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THE EPHEBIC OATH 

I WILL NOT BRING DISHONOR UPON 
MY ARMS, AND I WILL NOT DESERT 
THE COMRADE BY MY SIDE. I WILL 
DEFEND THE SACRED PLACES AND 
ALL THINGS HOLY, WHETHER ALONE 
OR WITH THE HELP OF MANY. I 
WILL LEAVE MY NATIVE LAND NOT 
LESS, BUT GREATER AND BETTER, 
THAN I FOUND IT. I WILL RENDER 
INTELLIGENT OBEDIENCE TO MY 
SUPERIORS, AND WILL OBEY THE ES- 
TABLISHED ORDINANCES AND WHAT- 
SOEVER OTHER LAWS THE PEOPLE 
SHALL HARMONIOUSLY ESTABLISH. 
I WILL NOT SUFFER THE LAWS TO BE 
SET ASIDE OR DISOBEYED, BUT WILL 
DEFEND THEM ALONE OR WITH THE 
HELP OF ALL. AND I WILL RESPECT 
THE MEMORY OF THE FATHERS. 
THE GODS BE MY WITNESSES 



The young men of Athens took this oath to the 

Commonwealth at the beginning of their second 

year of military service 



ELEMENTARY ECONOMICS 



BY 



THOMAS NIXON ^ARVER 

PROFESSOR OF POLITICAL ECONOMY, HARVARD UNIVERSITY 




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GINN AND COMPANY 

BOSTON • NEW YORK • CHICAGO • LONDON 
ATLANTA • DALLAS • COLUMBUS • SAN FRANCISCO 



COPYRIGHT, 1920, BY THOMAS NIXON CARVER 

ENTERED AT STATIONERS' HALL 

ALL RIGHTS RESERVED 



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PRIETORS • BOSTON • U.S.A. 



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1 1 INTRODUCTION 

There never was a time when men needed to think so seriously 
about the problems of national welfare as the present. It is plainer 
than ever that this is an economic question, that is, a question of 
economizing. It is the purpose of this book to examine the 
economic foundations of our national welfare and to point out 
some of the simpler and more direct methods of strengthening 
these foundations, to the end that our nation and all nations that 
aim at democracy and justice may prosper more and more. 

In order that there may be real improvement our people must 
themselves understand the principles upon which national pros- 
perity rests. People who do not govern themselves, but rely upon 
rulers to govern them, may ignore these questions ; but people who 
rule themselves have no one to depend upon but themselves. They 
must therefore know for themselves the leading principles of this 
great subject. 

The time to begin studying this subject in a systematic manner 
is when we first begin to think about public questions — that is, in 
early youth, for our youth are thinking about public questions and 
we could not stop them even if we wanted to. Much time is lost 
and much loose thinking results from postponing this study too 
long. Opinions are formed too hastily and with too little informa- 
tion, and when once formed they are hard to get rid of. No study 
can possibly be more important than that which will even slightly 
reduce the number of hasty and ill-founded opinions and train 
our future citizens in the habit of careful, painstaking study of 
public questions and of looking on many sides of each one before 
reaching a conclusion concerning it. 



CONTENTS 

PART ONE. WHAT MAKES A NATION PROSPEROUS 

CHAPTER PAGE 

I. What makes a Nation Prosperous 3 

II. Wealth and Well-Being 8 

III. The Geographical Situation 16 

IV. The Quality of the People 28 

V. Competition 39 

VI. Cooperation 45 

VII. Law and Government 51 

VIII. Morals and Religion 63 

PART TWO. ECONOMIZING LABOR 

_ IX . The Division of Labor y^ 

X. Power 83 

XI. Capital 91 

XII, The Organization of Business 100 

XIII. The Economical Use of Labor on Land . . . . iii 

XIV. Keeping a Proper Balance among the Factors of 

Production 117 

PART THREE. THE PRODUCTIVE ACTIVITIES 

XV. Ways of getting a Living 125 

XVI. The Extractive Industries 132 

XVII. The Genetic Industries 143 

XVIII. The Manufacturing Industries. . 159 

XIX. Transportation 170 

XX. Merchandising and the Professions 182 

vii 



viii CONTENTS 

PART FOUR. EXCHANGE 

CHAPTER PAGE 

XXI. Value: its Meaning 193 

XXII. Value: its Cause and Quantity . . . . . . 199 

XXIII. Scarcity 206 

XXIV. Money . 215 

XXV. Banking 223 

XXVI. Commercial Crises 235 

XXVII. International Trade . 244 

PART FIVE. DIVIDING THE PRODUCT OF INDUSTRY 

XXVIII. The Bargaining Process 253 

XXIX. The Law of Variable Proportions 257 

XXX. The General Nature of the Wage Question . 261 

XXXI. What determines the Rate of Wages . . . 266 

XXXII. The Organization of Laborers 276 

XXXIII. The Rent of Land 283 

XXXIV. Interest and the Demand for Capital . . . 290 
XXXV. Interest and the Supply of Capital .... 296 

XXXVI. Profits 301 

XXXVII. The Government's Share . . . . . . . . . 306 

PART SIX. THE CONSUMPTION OF WEALTH 

XXXVIII. Meaning and Importance of Consumption . . 319 

XXXIX. Rational Consumption , . " 325 

XL. Luxury 332 

XLI. The Control of Consumption 340 

XLII. The Battle of the Standards 346 

PART SEVEN. REFORM 

XLIII. Communism 353 

XLIV. Socialism 363 

XLV. The Single Tax 372 

XLVI. Anarchism 380 

XLVII. Constructive Liberalism 388 

INDEX 399 



ELEMENTARY ECONOMICS 

PART ONE. WHAT MAKES A NATION 
PROSPEROUS 



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CHAPTER I 
WHAT MAKES A NATION PROSPEROUS 

Production and economy the basis of prosperity. A nation 
prospers on what it produces. It can continue to prosper only so 
long and in so far as it continues to produce, year in and year 
out, century after century and millennium after millennium. Pro- 
duction, however, is not enough, — the nation must also economize. 
In fact, production itself is a form of economy. 

However much the nation produces, it prospers only in so far 
as it continues to produce, year by year, more than it con- 
sumes and wears out. When every year sees something added 
to the stock of durable goods, something additional produced for 
future years, there is an expansion and an accumulation of 
wealth ; in short, there is prosperity. If at any time a nation 
begins consuming in a year all that it produces that year, the 
accumulations of the past quickly deteriorate and disappear, 
prosperity is gone, and poverty lies ahead. 

Two primary factors in production. How much a nation can 
produce will depend primarily upon two things : first, upon its 
geographical situation, that is, upon how rich its land is in plant 
food, minerals, forests and power, how favorable its climate is, 
and how well it is situated for trade and transportation ; second, 
upon its people, that is, upon how energetic and how wise they 
are in making use of their natural resources. 

A nation's geographical situation is not easily changed ; but the 
habits of the people may be changed, and these are even more 
important than the geographical situation. By reason of their 
energy and wisdom, nations have grown rich and great in the midst 
of very poor geographical surroundings. Others have grown poor 
in the midst of rich surroundings by reason of their lack of energy 
or their unwisdom. A nation can therefore control the factor 



4 ELEMENTARY ECONOMICS 

upon which its prosperity most depends ; which means that it can, 
in most cases, be as prosperous as it deserves to be, or that it must 
blame itself and not its geography if it does not prosper. 

How to secure a full and wise use of the national energy, where 
millions of individual wills have to be persuaded and wisely di- 
rected, is one of the greatest and most important of all questions. 
The working energy of, say, a hundred million people is tremen- 
dous, but the opportunities for waste are also tremendous. Upon 
the wise utilization, on the one hand, or the waste, on the other, 
of that vast fund of energy hangs the question of the prosperity 
or the poverty of the nation. 

Hard work is, of course, necessary, but mere hard work is not 
enough. The work must be wisely directed. This requires a vast 
fund of knowledge — scientific, political, and administrative. It 
also requires organization, in order that each individual may do 
that for which he is best fitted and also in order that different in- 
dividuals may work with, rather than against, one another. 

Importance of economy. The word "economy," in its widest 
sense, includes the using of all the energy of the people and the 
wise direction of that energy. For any person to be lazy or idle 
is a waste of that person's energy and is therefore uneconomical. 
To direct that energy unwisely is to waste it in another way and 
is also uneconomical. Both forms of waste prevent the highest 
prosperity of the nation. 

What it means to economize. In its simplest possible sense, 
to economize is to choose among several different things that one 
would like to have, giving up the less important in order to have 
the more irhportant. This choosing takes on many forms. One 
may have to choose between play and work, between different 
kinds of work or different kinds of play, or between different 
objects which one might get for one's work or one's money. 

When you are asked to do a certain thing and you say that you 
have not time, you may be saying in a more polite way that 
there is something else which you consider more important than 
the thing you are asked to do. You are compelled to economize 
your time, since you have not time enough to do everything. You 



WHAT MAKES A NATION PROSPEROUS 5 

must leave many things undone, and it is necessary, therefore, that 
you choose very carefully the few things which you think it most 
important that you should do with your limited time and energy. 
Similarly, when you say that you cannot afford a certain thing, 
you frequently mean that there are other things for which you 
think it more important that you spend j^our money. Not having 
money enough to buy everything, you must choose very carefully 
and try to get the few things which will be worth most to you in 
the long run. To do otherwise either with your time or your money 
would be to fail to achieve the largest prosperity or well-being. 
This is as true of a nation as of an individual. 

Why we have to economize. When you say that you do not 
have time to do a certain thing or that you cannot afford to buy 
a certain object, you are stating two of the fundamental facts of 
life : first, the ever-present fact of scarcity ; second, that you are 
an economic being, capable of recognizing the fact of scarcity and 
of guiding yourself accordingly. It is the fact, of scarcity that 
makes it necessary for us to economize, and it is our wisdom 
that enables us to meet the situation and conform our lives to 
it. The fact that our time and energy are scarce or insufficient 
to enable us to do everything that we should like to do makes it 
certain that we cannot produce or earn everything that we should 
like to have. Besides, if we were to work all the time we should 
have no time to play; and everybody likes to play — that is, 
everybody worth mentioning. One of our many problems of 
economy is therefore that of choosing whether to deprive ourselves 
of the opportunity to play in order to get certain goods that we 
want, or to do without the goods in order to have time to play 
as much as we should like. 

At every step in the life of every normal person he is confronted 
with some problem of economy, and the necessity for economy 
grows out of the scarcity of something or other. We never think 
of economizing things that are sufficiently abundant to satisfy 
everybody, such as air, sunlight, water in many places, wood, 
stone, or sand in others. Let any of these things become scarce, 
however, and we must begin to economize them. 



6 ELEMENTARY ECONOMICS 

It happens that in the spots where most of us live many desir- 
able objects are scarce. These objects must be increased — and 
that requires an economical use of our time and energy — or they 
must be economized and made to go as far as possible in the 
satisfaction of our wants. Show me a person who experiences no 
lack or scarcity of anything and I will show you a person who has 
no need for economy ; but you will look a long time before you 
find him. Show me a creature who does not appreciate the fact 
of scarcity and I will show you a creature who does not know 
enough to economize, however much he may need to. 

Getting and utilizing. In the practical everyday life of the 
average person of the present, the problems of economy come 
mainly under the heads of getting and utilizing, of income and 
expenditure, or of business and household management. A person's 
common experience of scarcity takes the form of an income which 
will not buy all the things he desires or, which means the same 
thing, of desires which run beyond his income. 

Three ways of economizing. One must, therefore, because of 
scarcity, economize, first, by using his time and energy to better 
advantage in order to get a larger income ; second, by spending 
his income as wisely as possible so as to buy the things he needs 
most ; third, by economizing the goods purchased so as to make 
them go as far as they will. Most men have to economize in all 
these ways. The greater part of the time and attention of all 
civilized men is spent on these matters of economy, which is one 
reason why the study of economics is the most important of all 
studies. Whether they prosper or not depends upon how well they 
solve these problems. 

A glance at the diagram at the beginning of this chapter will 
give one a general view of all the forms in which the problems of 
getting and utilizing present themselves. This also gives in out- 
line the leading branches of the great science of economics, which 
has to do with the problems of getting and utilizing things that 
are scarce. It has nothing to do with things that are not scarce 
and therefore do not have to be economized. When a thing is 
scarce, it leaves some of our wants unsatisfied. If we can produce 



WHAT MAKES A NATION PROSPEROUS 7 

or economize it, it leaves fewer wants unsatisfied and leaves us 
better off. That is the way we increase our prosperity. 

Production, itself, is a form of economy. It requires, first, that 
we utilize our working power and not let it lie idle ; second, that 
we utilize it wisely, doing the most important things and leaving 
the less important things undone; third, that we do what we 
undertake in the most efficient way, with the least waste of effort. 
After goods are produced, their wise use is another form of 
economy. Economy,, in this wide sense, is the basis of all 
prosperity. 

EXERCISES 

1. What are the two principal things upon which the prosperity of 
a nation depends ? Which is the more important ? Why ? 

2. Why is economy so important ? 

3. What does it mean to economize ? 

4. Why do we have to economize? 

5. In what three ways does the average man economize? 

6. Why is it more important that we give attention to things that 
are scarce than to things that are sufficient? 



CHAPTER II 

WEALTH AND WELL-BEING 

Prosperity and wealth. The study of national prosperity 
must necessarily lead to a study of such things as wealth and 
well-being. Prosperity consists in getting an adequate supply of 
those things called wealth and in utilizing them wisely. When we 
have secured an adequate supply of those things we have the 
means of well-being. When we have utilized them wisely we have 
achieved well-being. ^The p^a terial nbierts whirh we tr^^J:o geL 
and to utilize are called upej 



What are economic goods ? Before we can go very far in our 
study of getting and utilizing, or of production and consumption, 
we must get a clear idea of the sort of things that men try to pro- 
duce or to get. When it was stated in the last chapter that the 
necessity for economy arose out of the fact of scarcity, it might 
have been guessed at once that scarcity has a great deal to do 
with our concept of wealth and with our efforts to produce it. 
At any rate the only things we try to produce are the things of 
which we do not have enough. These are the things about which 
we are anxious. The very first step toward a true understanding 
of the nature of wealth, then, is a clear perception that wealth, in 
the economic sense, consists of things that are scarce and therefore 
need to be economized. Some very useful things are very abund- 
ant, however, — so abundant that everyone can have all he wants. 
Such things do not have to be economized, hence they are not 
economic goods. Only those things are economic goods which 
have to be economized ; that is, which are scarce. 

Two meanings of wealth. Now the word ^^ wealth" has two 
meanings. In the first place, it is the collective name for all 
economic goods, or for all goods that have to be economized ; that 

8 



WEALTH AND WELL-BEING 9 

is, for goods that are scarce. In the second place, it is the name 
of a condition or state of being. It comes from the older word 
"weal," which means very much the same as ''well-being." 
These two meanings, while apparently different, are yet very 
closely related. The condition of well-being which we call wealth 
in the latter sense depends upon the possession of an adequate 
supply of those things which we call wealth in the former sense ; 
that is, of the things which are ordinarily scarce. He who lacks 
an adequate supply of these things is poor, though of air, sunshine, 
and other things which are not scarce he has as much as any- 
body. He who possesses an adequate supply of scarce things is 
wealthy, or in a state of wealth. In short, those economic goods 
called wealth are the goods upon which weal, or well-being, de- 
pends. Well-being is increased when these goods are increased 
or economized ; well-being is decreased when these goods are 
decreased or wasted. 

How well-being depends upon wealth. It could not be said 
of anything which is not scarce that our well-being increases 
when we have more of it and decreases when we have less of it. 
There is such an abundance of air, for example, under ordinary 
circumstances, that no one would be any better off than he is 
now if the supply of air could be increased, nor would anyone 
be any worse off if the supply of air were slightly decreased. 
In other words, no one's well-being depends upon more air, even 
if it could be produced. If, however, air were so scarce that 
there was not enough to go around, then not only would it 
need to be economized very carefully but there would be some 
advantage in producing more of it, if that could be done. The 
weal, or well-being, of mankind would be improved in propor- 
tion as more air could be produced ; mankind would be injured 
in proportion as air was wasted or destroyed. While, there- 
fore, we can say that air is a necessity in a certain absolute 
sense, yet in a practical economic sense we cannot say that anyone 
would be better off if more air were produced or if it were even 
wisely economized ; nor can we say that anyone would be worse off 
if a little air were destroyed or wasted. There would still be 



10 ELEMENTARY ECONOMICS 

enough to satisfy everybody. That is why air, though an abso- 
lute necessity, is not an economic good. 

The question of having more or having less. Water is an- 
other illustration; perhaps a better one, because there are many 
places where water is so abundant that it does not have to be 
economized at all and other places, such as the arid West, where 
it is so scarce that it has to be economized very carefully. In the 
former places water is not wealth ; in the latter it is. In the 
former no one labors to secure any more ; in the latter they do. 
In the former no one would be better off if there were more water ; 
in the latter some people would be better off. In the former well- 
being does not depend upon a little more or a little less water ; 
in the latter it does. In the former there is no occasion for 
economizing water; in the latter it is very important that it be 
economized and made to go as far as possible. In the former the 
formula " more water, greater well-being ; less water, less well- 
being " is not true ; in the latter it is true. This is the test in every 
time and place as to whether water is wealth or not. All that has 
been said of water may be said of anything else. The same test 
must be applied to determine whether it is wealth or not. 

In the diagram given below is a classification of all tangible ob- 
jects with which it would be possible for man to concern himself. 



Tangible 
Objects 



Objectsof repugnance("Illth")|™"S' ^^'"'^"^ '" ™=>" 

L Things useful but too abundant 

^^^.' . f ■ i-rr f Thlngs usclcss but not harmful 

Objects of indifference -{ ^, . ^ ,, ^^ . . 

I. Things useful but suincient in quantity 

L Objects of desire (Wealth) : Things useful and scarce 



Those which are harmful to him he must try to destroy. To- 
ward those which are useless without being in the way or being 
otherwise harmful he is indifferent. Those which are useful to 
him, called goods, concern him most. Of these, some are too 
abundant at certain times and places. In such times and places 
his attitude toward them must be very much the same as that 
toward those which are positively harmful. Yet when they exist 
in smaller quantities — that is, in quantities less than he needs — 




WHERE WATER IS WEALTH 



12 ELEMENTARY ECONOMICS 

he will strive as hard to get more as he will strive to reduce the 
supply when they are too abundant. Water in swampy land is 
an example of overabundance ; in desert land, of underabundance. , 
Manure in a city livery stable is an equally good example of over- 
abundance ; in a sterile field, of underabundance. 

Relation of value to economic goods. We have gone to con- 
siderable pains to point out that one characteristic of economic 
goods is that they are always scarce. It is this which gives them 
the power to induce men to work and to economize. Another char- 
acteristic is that they all have value, or power in exchange. The 
power to command other desirable things in peaceful and voluntary 
exchange — that is, value — is very much the same as the power to 
induce men to work. That is to say, the thing which possesses one 
kind of power will always possess the other, if, indeed, it be not 
incorrect to speak of them as different kinds of power. The object 
which possesses this power to appeal to human motives in such a 
way as to induce men either to give up some desirable object in ex- 
change for it or to labor in order to produce it is always said to 
be valuable. This power depends in all cases upoii the scarcity or 
insufficiency of the existing supply of the object in question. 

These things, again, are economic goods, or wealth. Since, as 
we have just shown, they all possess value, it amounts to the same 
thing to say that wealth consists of things that have value. In 
short, such words as "wealth," "value," "economic goods," and 
"economy" all center around the one great fact of scarcity, — 
the insufficiency of certain things at certain times and places to 
satisfy desires. Out of this great fact grow also such ideas as 
property, industry, and foresight. No one wants to secure prop- 
erty rights, for example, in anything of which everybody has 
enough. But when anyone fears that there may not be enough 
of a certain thing to go around, and that he may, therefore, be 
left out, he naturally wants to guard against that calamity by 
getting possession of a supply. He will try to get possession of 
a supply either by producing it himself or by buying it of someone 
else, and he will try to guard his treasure carefully. When the 
state steps in and undertakes to protect him in his possession, he 



WEALTH AND WELL-BEING 13 

has then secured a property right in the thing in question. Again, 
productive industry, as already shown, is directed toward lessening 
scarcity, or increasing the supply of something whose supply 
would otherwise be insufficient. Frugality and foresight are exer- 
cised to provide against further scarcity. 

Meaning of scarcity. A thing is scarce when there is not as 
much as people want. A thing may be rare without being scarce 
and scarce without being rare. Flies are rare in winter time in 
cold countries, but they cannot properly be said to be scarce 
because no one wants any more. Grass cannot be said to be rare 
in summer time, but if there is not enough for the farmer's cattle, 
the farmer at least will want more. In that sense grass is scarce, 
even in summer. 

Scarcity a matter of time and place. A thing is scarce, if 
at all, in some definite time and place. No matter how much 
water there may be in the Mississippi River, it does not alter the 
fact that water is scarce a few liundred miles to the westward ; 
no matter how much copper there may be in the bowels of the 
earth, it does not alter the fact that there is less copper in avail- 
able form than is needed on the surface. It is this fact which 
induces men to labor to move things from one place to another. 

Before proceeding farther it is necessary to make one important 
qualification — men do not always know what they really need or 
upon what their well-being depends. If they are mistaken on 
any phase of this question, they will be placing a high value 
upon some things that are not good for them and a low value 
or no value at all upon some things that are good for them. 
They are poor economizers who do this, but there are many poor 
economizers in the world. If they think they need more than they 
have, they will strive to get more, either by offering something for 
it, thus giving it a market value, or by trying to produce it, 
thus creating an industry. This explains why it is that the student 
of economics is sometimes compelled to include among economic 
goods, or wealth, articles which he himself would not use or 
which he regards as harmful, such as opium, alcoholic drinks, or 
tobacco. 



14 ELEMENTARY ECONOMICS 

Importance of desiring the right things. It sometimes hap- 
pens that men desire things which they do not need and need 
things which they do not desire. In such cases they will try 
to get or produce what they desire rather than what they need. 
The industries will be organized to produce the things which the 
people desire. If they desire opium or vodka they will produce 
these things rather than things that will do them more good. 
In such cases the more efficient their system of production be- 
comes the more harm they will do themselves ; and an efficient 
industrial system promotes national deterioration rather than 
national well-being. If one were to make a study of the wreckage 
of nations, one would probably find that more had decayed because 
their wants were wrong than because they were not able to supply 
their wants. Teaching or persuading people to want the right 
things has 'commonly been regarded as the work of the educator 
and the preacher, but no one who really has at heart the welfare of 
the people can be indifferent to the quality of their wants or 
desires. 

Necessity of economizing means of production. Thus far in 
discussing the necessity for economy we have been considering the 
means of satisfying our wants directly. But we must also consider 
the necessity of economizing the indirect means of satisfying 
wants. In the effort to produce goods to satisfy our wants it 
is necessary to make use of various factors of production, such 
as labor, tools, raw materials, etc. These do not themselves satisfy 
our wants, but they enable us to produce things that do satisfy. 
They also are scarce and haye to be economized. 

To be sure, many things that are essential to production are 
not scarce. These are not considered as factors of production; 
that is, they are not economic factors of production at all. Carbon 
dioxide is just as essential to the growing of plants as nitrogen, 
phosphorus, or potash, but there is plenty of carbon dioxide in the 
air ; whereas, in most soils, nitrogen, phosphorus, and potash are 
scarce or tending to become scarce. Therefore these three sub- 
stances are considered as factors — that is, economic factors — 
in plant growth. Applying the same formula here as we did to 



WEALTH AND WELL-BEING 15 

other things earlier in this discussion, the average farmer can say, 
and say truly, " More nitrogen, more plant growth ; less nitrogen, 
less plant growth." Therefore agricultural production is increased 
by increasing' the nitrogen in the soil. The same may be said of 
phosphorus and potash, but the formula does not apply to carbon 
dioxide. This is a principle of the very greatest importance, as 
will be seen later. Some of the greatest problems in economics 
and social justice depend upon this formula and are incapable of 
solution without it. 

Why a thing has value. The fact that desirability and scar- 
city, and these alone, give value to a thing is perhaps clearly 
enough established by this time. Few will care to question the 
statement that not only must men desire a thing but they must 
desire more than they have before they will strive to get more 
either by purchasing it or by producing it. Moreover, this is as 
true of a factor used in production, such as tools, as of an article of 
direct consumption, such as bread. It may not be quite so obvious, 
but it is none the less true, that this is also one of the great 
sources of that conflict of human interests which gives rise to 
most of our problems of justice and equity. 

EXERCISES 

1. What are economic goods? 

2. In what two senses is the word "wealth" used? 

3. In what sense does well-being depend upon economic goods 
as distinguished from things that are abundant enough to satisfy 
everybody ? 

4. Of what class of goods can you say that you are better off as 
you get more of them and worse off if you have less of them? Can 
you say this of air ? of water ? If so, under what conditions ? 

5. What goods have value? Why? 

6. What do you mean by scarcity ? Is it the same as rarity ? 

7. What is a factor of production? Is labor a factor of production? 
Is land a factor of production? Could your neighborhood produce 
more goods if it had more land? Are tools, machines, and buildings 
factors of production ? Could your neighborhood produce more goods 
if it had more tools, machines, and buildings ? 



CHAPTER III 
THE GEOGRAPHICAL SITUATION 

It was stated near the beginning of Chapter I that a people 
must generally blame itself rather than its geographical situation 
if it does not prosper. The human factor 'is more important than 
the geographical factor in determining national prosperity. Never-, 
theless the geographical factor is not to be ignored. However, 
gifted, energetic, and farsighted a race may be, it will find it 
easier to expand and become prosperous in a rich than in a 
sterile country. In view, however, of the wonderfully rich territory 
occupied by the American people, it is obvious that they cannot 
excuse themselves on the ground of limited resources if they do 
not become as prosperous and as great a people as they would 
like to be. Their prosperity, power, and greatness are limited 
mainly by their own energy, wisdom, and virtue rather than by 
their environment. 

What is a favorable geographical situation? It is easy to 
overemphasize the bodily comfort of living in a warm as opposed to 
a hot or cold climate and to ignore the bracing effects of change- 
able weather. It is also easy to overemphasize the tremendous 
productivity of certain tropical regions and to forget that they 
produce the enemies as well as the friends of man in great pro- 
fusion. It is equally easj^ to go too far in the opposite direction 
and to hold that hard conditions, such as a harsh climate and a 
sterile soil, are best for man's development. If hard conditions 
are all that men need, the Eskimos of the Far North are peculiarly 
blessed. 

If we take everything into consideration, it is probable that the 
temperate zones are most favorable to man's development as well 
as to his prosperity. He has here fewer unconquerable enemies 

i6 



THE GEOGRAPHICAL SITUATION 17 

than in the tropics or in the frigid zones. He finds a wider variety 
of useful materials, such as grass, timber, and mineral^, and he 
finds them in greater abundance here than elsewhere. Here the 
advantages to be gained by work are more obvious and more 
easily comprehended by the average intellect than anywhere else. 
The intelligence required to see the advantage of building shelters, 
making clothing, and kindling fires, especially in a place where, 
along with the cold weather, there is an abundance of suitable 
material, is not very great. It requires much more scientific knowl- 
edge to enable men to guard against the hookworm and the various 
harmful bacteria which infest the tropics. These, together with 
venomous insects and reptiles, not to mention the larger beasts 
of prey, imperil the lives of the dwellers in the tropics quite as 
much as our cold winters imperil the lives of dwellers in these 
northern latitudes. 

Northern-grown crops are generally best. It is a fact of 
observation^ however we may account for it, that many of our 
farm crops reach their highest perfection very near the northern/ 
limits of the areas within which they can be grown without injury/ 
from the frost. The Cotton Belt of this country, though confined/ 
to the Southern states, is in reality near the northern limit for 
cotton. Our Corn Belt is likewise near the northern limit for corn.' 
The oranges of California and Florida also are grown near the 
line where frost will destroy the crop. The potato and the sugar 
beet ^o better either in high altitudes or high latitudes, where the 
summers are barely warm enough and the seasons barely long 
enough to mature the crop. 

One explanation of this general rule is that by migrating north- 
ward a plant escapes many of its ancient and hereditary enemies. 
When seed corn is saved, dried, and protected during the winter, 
and special care given it during the growing-season, it can grow 
farther north than w^ould be possible if it had to shift for itself. 
Its natural enemies in its original home, not having man's help, 
cannot live over winter or mature between frosts in our Corn Belt. 
Therefore the corn plant escapes some of its worst enemies. The 
same is true of the cotton plant (though some of its ancient 



1 8 ELEMENTARY ECONOMICS 

enemies seem to be following it northward) and also of other 
plants which seem to flourish under cultivation in latitudes where 
they could not survive without help. This is an important factor 
in enabling large numbers of men to produce an adequate food 
supply in northern latitudes. 

Similarly, when man learns to keep himself warm by building 
houses, manufacturing clothing, and making fires, he can live in 
latitudes which enable him to escape some of his ancient and 
hereditary enemies, such as the hookworm and the germs of 
yellow fever, malaria, etc. The northern limit of his best develop- 
ment, however, must coincide with the northern limits of the 
production of abundant means of satisfying his many desires. 
Another advantage of growing food crops as far north as the 
seasons will permit is that during the growing-season for plants 
— that is, during the summer — the days are longer in high than 
in low latitudes. This gives plants more light while they are 
growing. The proportion of sugar in sugar beets, for example, 
seems to depend partly upon the amount of sunlight which they 
get while they are growing. 

Buckle's generalizations. In his famous work, "The History 
of Civilization in England," Henry Thomas Buckle makes a great 
deal of several other factors in the geographical situation besides 
those already mentioned. These he groups under four heads ; 
namely, climate, food, soil, and the general aspect of nature. He 
goes to the extreme of attributing to these factors a controlling 
influence, not only on the economic prosperity of the people but 
even on their intellectual, moral, and religious development as 
well. Without following him to these extremes, we may profitably 
give attention to some of his observations regarding the influence 
exercised by these factors on the industrial development of a 
people. No one is likely to deny that the presence of cheap coal 
has had a great deal to do with the economic development of 
Europe and xA.merica, or that the former abundance of timber in 
this country had a great deal to do with the kind of houses we 
built and are still building. A shingled roof, for example, is un- 
known except in countries where timber has been abundant. 



THE GEOGRAPHICAL SITUATION 19 

That ancient civilizations arose in regions where labor applied 
to land was highly productive is a commonplace in history. The 
fertile river valleys of Egypt, Mesopotamia, India, and China 
supported civilizations when our European ancestors were still 
savages. Here food was so abundant that men had time to do 
other things besides satisfying their immediate daily needs; or, 
rather, a part of the population could produce food enough to 
support the rest while the latter gave their time to other things. 
The civilizations which have since grown up in latitudes farther 
north may not have exceeded those earlier civilizations in physical 
magnificence, but they have exceeded them in all that makes for 
the comfort and well-being of the average man. 

On the other hand, the overpowering influence of the terrific 
productiveness of nature in certain tropical regions is sufficient to 
discourage man's enterprise. Kipling's story entitled "Letting in 
the Jungle"^ gives a vivid picture of the way in which the 
jungle struggles to reassert itself, — to flow back, as it were, upon 
a cleared area and overwhelm it as with a flood of rank vegetation. 

It should be remembered, however, that this dependence of 
man upon nature grows less and less with the advance of civili- 
zation. Man tends more and more to dominate nature through 
his greater knowledge of and control over physical forces. It is 
therefore true, as stated in the beginning of this chapter, that the 
human factor is today more important than the geographical factor. 

The geographical advantages of the United States. Coming 
to our own country, we have a combination of most of the geo- 
graphical factors mentioned by Buckle and others. We have the 
broken landscape, low mountain ranges, and small rivers of the 
Atlantic seaboard, the great fertile valley of the Mississippi and 
its tributaries, the vast plains of the great West, the semidesert 
conditions of the Southwest, the towering mountain ranges of the 
Rockies and the Sierras, and the mild climate and gentle slopes 
of the Pacific coast. If the mind of man is strongly influenced 
by its geographical surroundings, we have an opportunity of 
developing a many-sided and variegated civilization. 
1 In " The Second Jungle Book." 



20 ELEMENTARY ECONOMICS 

Rainfall. The eastern half of the United States, being vir- 
tually surrounded on three sides by water, like the greater part 
of Europe, is assured of an adequate quantity of moisture; 
the western half is more or less deficient in moisture, except 
the extreme northwest corner and certain high mountain 
altitudes. These arid and semiarid regions, where the streams do 
not supply water enough for irrigation, may, in places where con- 
ditions are favorable,, be made to grow crops under methods known 
as dry farming. The rest will probably be a permanent grazing 
country. Even our irrigable land, while but a fraction of the 
total, amounts to a small empire in itself. 

The great crop belts. A broad strip running from the Atlantic 
seaboard to the hundredth meridian, and a little north of the 
middle, comprises the great grain, hay, and live-stock region. 
Another broad strip, lying south of this, is the Cotton Belt. 
Along our northern border, from Maine to northern New York, is 
a lumber, dairy, and potato region and a natural summer play- 
ground for the city people. A continuation of this strip, includ- 
ing the northern halves of Michigan, Wisconsin, and Minnesota, 
is an undeveloped region, formerly covered with forest but now 
largely cut over. Most of it is excellent land for potatoes and 
small grains and is capable of feeding a vast population. 

Another undeveloped strip along the Gulf coast from Florida 
to Texas, just south of the Cotton Belt, is also largely cut-over 
timberland. Much of this is ideal land for fruit and truck farming 
and the growing of such great food crops as sweet potatoes. 

Whenever the demand for food is such as to insure a remunera- 
tive price for potatoes, both white and sweet, almost unimaginable 
quantities can be grown along our northern and southern borders 
without interfering with the growing of corn, wheat, or cotton in 
the belts which are especially adapted to these great crops. So 
far as starchy food is concerned we have opportunities for produc- 
ing incalculable quantities. Animal products also can be produced 
in quantities sufficient for a population very much greater than 
the present, though it is easy for unthinking people greatly to 
exaggerate the possibilities in this direction. 



THE GEOGRAPHICAL SITUATION 



21 



The central valley. The Mississippi Valley — that is, the 
whole interior basin of the country — is one of the most productive 
regions in the entire world. In fact, it is doubtful if any region 
of equal area can be found anywhere on the globe which contains 
so great a variety and abundance of natural riches, both on the 
surface and beneath the surface. 

This region includes the greater part of our Cotton Belt, and we 
produce nearly three fourths of the cotton of the world. It in- 
cludes all of what is known as our Corn Belt ; that is, the region 
where corn is the main crop, though corn is grown in every state 




THE SOURCE OF THE GREATER PART OF THE WORLD S CLOTHING 



in the Union. Com is not only our most valuable crop but our 
most valuable single product of any kind or description ; we also 
grow nearly three fourths of the world's production of this, the 
most magnificent of all crops. In this region are also the great 
spring-wheat areas of Minnesota and the Dakotas and the winter- 
wheat area extending from Ohio to the Great Plains, reaching 
its greatest density in Kansas and Nebraska. While we produce 
on the average only between a fourth and a third of the world's 
total wheat crop, we yet produce more than any other single 
country at the present time. Aside from these major crops, this 
region is also rich in a number of minor crops and grows practically 
everything which will grow outside the tropics. 

Farm machinery. The reasons for this great productivity 
are, first, the vast area ; second, the uniform fertility of the soil ; 
third, the uniformly level contour, making farm operations 



26 ELEMENTARY ECONOMICS 

relatively easy and inexpensive; fourth, the uniformly favorable 
climate; fifth, the general use of farm machinery. There is 
probably no single area in the world where so much and such 
efficient farm machinery is used in order to supplement the 
labor of men. 

In addition to the natural ingenuity of our people, the general 
smoothness of the land and the favorableness of the climate 
must be held to account for the use of farm machinery. The 
summers (especially the late summer months) in this region are 
relatively dry. This has had an important effect in encouraging 
the use of harvesting and haymaking machinery. In some of the 
countries of northwestern Europe, where clear, dry weather is rare, 
the curing of hay and the drying of harvested grain are more 
difficult problems than with us. The quick curing and rapid 
methods of harvesting and storing which are familiar to us are 
there impossible. 

Mineral wealth. Beneath the soil in this region lies a wealth 
of minerals. Bituminous coal underlies a great deal of it from 
Pennsylvania to Wyoming. Petroleum and natural gas abound 
in the same region, and oil fields extend southward to the Gulf. 
Some of the richest and most extensive beds of iron in the world 
lie in northern Michigan and Minnesota. 

Ease of transportation. Throughout this region transportation 
is easy. The Great Lakes furnish cheap water transportation, as 
do (to a less extent) the Mississippi and its larger tributaries. But 
its greatest advantage for transportation is its wide extent and its 
level contour, making railroad building and operation relatively 
inexpensive. 

Bordering on this vast region, which must more and more be- 
come the real home and habitat of the American people, are the 
Atlantic and Pacific seaboards, adding other mineral wealth, 
forests, water power, fisheries, and opportunities for foreign trade 
to the wealth-producing 'power of the whole. 

Reasons for modesty as well as for pride. Before we take 
too much credit for our national wealth and prosperity we should 
ask ourselves to what extent we are responsible for it and to 



THE GEOGRAPHICAL SITUATION 27 

what extent nature assisted us. It will be a wholesome exercise 
for us to write down a list of achievements in what we have 
led the world, and then to ascertain to what extent these are 
due to our own intelligence, energy, courage, and devotion to 
ideals and to what extent to our favorable geographical situation 
and the richness of our resources. 

We produce more iron and steel, more corn, cotton, and wheat, 
than any other country. There are excellent geographical reasons 
why we should. Mechanical inventions, the breeding of the trot- 
ting horse, and the building of public libraries are among the 
activities in which we have surpassed other people without the 
special aid of superior physical advantages. 

EXERCISES 

1. What is meant by a favorable geographical situation? 

2. Where do most crops reach their highest development? 

3. Does man's dominion over nature increase or does it decrease 
with the advance of civilization? 

4. Are the tropics more favorable or are they less favorable to man's 
development than the temperate zones? Give reasons. 

5. Name some of the geographical advantages of the United States 
(i) in agriculture, (2) in mining, (3) in transportation, (4) in 
manufacturing. 

6. Name some activities in which the people of the United States 
excel the rest of the world. Has our success been due mainly to our- 
selves, to our geographical situation, or to a combination of both? 



CHAPTER IV 
THE QUALITY OF THE PEOPLE 

If the human factor is, as stated in Chapters I and III, the 
most important factor in national prosperity, it is more important 
that we study this factor than that we study the geographical 
situation. The human factor includes the people themseWes and 
their institutions — their habits, customs, laws, government, 
morals, and religion. In this chapter we are to consider the 
quality of the people themselves and, in the chapters which follow, 
some of their institutions. 

Why man rules over the rest of animal creation. In attempt- 
ing to discuss the quality of the people we must limit ourselves to 
a few of the most important facts. There are certain outstanding 
qualities which man possesses in greater degree than the brutes, 
which civilized man possesses in greater degree than the savage, 
and which, in any civilized community, the more successful classes 
possess in greater degree than the less successful. There are other 
qualities, such as muscular strength, which the brutes, many of 
them at least, possess, in greater degree than man. If these were 
the important qualities, man could scarcely claim superiority over 
the brutes. There are other qualities, such as the sense of smell 
and the ability to endure pain, which certain savages seem to 
possess in greater degree than civilized man. If these were the 
important qualities, civilized man could scarcely claim superiority. 

Our present problem is to form some sort of intelligent opinion 
as to the qualities which a people need in order to become pros- 
perous, powerful, and great in an economic and worldly sense. 
The following outline is suggested. Whatever may be said on 
purely religious or moral grounds, a nation whose people are pos- 
sessed of these qualities in superior degree will have an economic 
advantage over a nation whose people possess them in less degree. 

28 



THE QUALITY OF THE PEOPLE 29 

THE CHARACTERISTICS OF A CAPABLE RACE 

1. Knowledge of 

a. The physical world 

b. The world of men 

2. Forethought, as shown by 

a. Industry 

b. Thrift 

3. Dependableness, made up of 

a. Honesty 

b. Sobriety 

c. Courage 

d. Fidehty 

4. Reasonableness, as shown by 

a. Eagerness to learn 

b. Obedience to law 

c. Willingness to cooperate 

Man has achieved " dominion over the fish of the sea, and over 
the fowl of the air, and over the cattle, and over all the earth, and 
over every creeping thing that creepeth upon the earth " by reason 
of certain powers or qualities which he possesses in higher degree 
than they. These are, first, his greater knowledge of and control 
over the forces of nature ; second, his greater forethought in 
making provision for the future and working for distant ends ; 
third, his greater power of organization, or teamwork. This 
power of organization is the result mainly of two factors — his 
dependability and his reasonableness. The same powers, or qual- 
ities, have given the civilized man dominion over the savage and 
the intellectual man dominion over the ignorant man. In the 
future, as in the past, we must expect the world will be ruled by 
the nations which possess these qualities in the highest degree. 

Physical advantages over the brutes. Man's erect posture, 
leaving his hands free to be used for other purposes than for 
locomotion, must be counted as a great advantage over the brute 
creation. A thumb which opposes the fingers and gives him a 
better grasp adds greatly to this advantage. These advantages, 
however, would not count for much if he did not have a mind 
which enabled him to devise tools to be grasped and used with his 



30 ELEMENTARY ECONOMICS 

thumbed hands. So far as the upright posture and the thumb are 
concerned, while they give man an advantage over the brutes, they 
alone do not give the civilized man any advantage over the 
savage. The posture of the savage is as upright, and his thumb 
as handy, as the civilized man's. In seeking, therefore, the ad- 
vantages which have given the civilized man dominion over the 
savage we must look at the mental and moral qualities. 

Intellectual advantages of civilized man over savages. 
Knowledge of the forces of nature may almost be said to include 
control over them, though the erjpct posture and the thumb assist 
in that control. The physical world includes not only the physical 
objects which surround us but their properties and the forces 
which govern them as well. To know our physical world, there- 
fore, means to know the properties of matter and the forces which 
operate in and through it. In short, this is to have scientific knowl- 
edge. It is this which underlies all our mechanical improvements. 
Our social environment includes human beings and all their powers, 
characteristics, habits, emotions, etc. A knowledge of one's social 
environment includes such a knowledge of man and his ways as 
will enable one to work with other men comfortably, knowing 
what to expect and what to depend upon. This is particularly 
important in those who are intrusted with the work of governing. 

Forethought. Forethought is only one aspect of what may be 
called the time sense. Among the many definitions of man is one 
which says that he is the being "who looks before and after." 
His memory of the distant past and forethought for the distant 
future modify his actions in the immediate present more than the 
actions of any other creature are modified. 

Even industry is chiefly carried on because of the vivid appre- 
ciation in the present of those needs which are certain to arise in 
the future. Those creatures which appreciate future needs most 
vividly will, of course, labor most assiduously. The same difference 
shows itself among men. Those nations and those individuals who 
see most clearly in advance what their future needs are likely to 
be are the nations and the individuals who show the greatest 
industry and the greatest thrift. 



THE QUALITY OF THE PEOPLE 31 

Thrift. Thrift differs from industry in that it consists in saving 
that which is aheady produced or possessed, whereas industry 
consists in producing or gaining possession of desirable objects. 
Even more than industry, thrift is a mark of forethought. It re- 
quires an even stronger self-control, combined with a keener sense 
of the importance of future needs, to lead one to refrain from 
consuming that which is already produced than it does to work 
to produce that which does not yet exist. However, the two 
things must always go together, in the community at least if not 
in the individual. Some farmer must save seed before any farmer 
can labor successfully at the growing of next year's crop. 

Knowledge and forethought are primarily mental qualities, 
though there is an element of morality in forethought ; depend- 
ableness and reasonableness are primarily moral qualities, though 
there is an element of mentality in both of them. In this age of 
great mental achievements, especially in the fields of physical 
science and mechanical invention, there is a tendency to under- 
estimate the importance of moral qualities. This tendency may 
have been increased by the perception that moral teachers them- 
selves have sometimes overemphasized the lesser virtues — that is, 
those which count least in the improvement of human life — and 
underemphasized those which count most. 

Moral advantages of civilized men over savages — depend- 
ableness. Nothing can be more important in the building of a 
great and prosperous nation than dependableness. Many writers 
have taken pains to point out how dependent we are upon one 
another in a highly civilized state. One way of illustrating this 
mutual dependence is by comparing a highly developed society 
with a complicated machine or a highly developed animal or- 
ganism. There are many striking resemblances, among the most 
important of which is the interdependence of parts. 

This interdependence of parts increases as we ascend in the 
scale of organic life. In the human body, for example, or in that 
of any of the higher mammals the interdependence of parts is 
much greater than that found in the bodies of the lower forms of 
life. The same change is noticeable as we ascend in the scale of 



32 ELEMENTARY ECONOMICS 

social life. Each individual tends to specialize in some particular 
kind of work and to depend upon other individuals who have 
specialized in other kinds of work to supply him with goods and 
services which he cannot produce or perform for himself. Some 
of the reasons why this is so advantageous will be discussed in 
the chapter on The Division of Labor. 

There can be no great amount of dependence of one upon an- 
other where the people are not dependable. This is equally true 
of a machine or an animal organism, but we do not attribute 
moral qualities to the parts of any of them. The wheel in a 
machine has no choice. It must of physical necessity do whatever 
its construction requires it to do. Although there is no physical 
necessity compelling a person to be dependable, as is the case 
with the parts of a well-made machine or the organs of a healthy 
body, yet it is just as important that he should be; otherwise 
civilization cannot advance at all. 

Our mutual dependence is of various sorts and degrees. If 
someone fails to do that which he is expected to do, he may im- 
peril the lives of hundreds or thousands of his fellow men, as in 
the case of a switch tender or a locomotive engineer ; he may 
occasion the loss of valuable property or he may, as in the case 
of an unpunctual person, merely upset our calculations and cause 
many of us to waste our time waiting for him or guessing what 
he is likely to do. In all these cases, in greater or less degree, 
the undependable person occasions loss to the nation. The time 
we waste on account of his lack of dependableness is as truly a 
loss as the property which is destroyed. Aside from the direct 
loss of time and property there is the greater loss which comes 
from the discouragement of enterprise, the lack of confidence, and 
the general demoralization which ensue when men can no longer 
rely upon one another. When we can no longer depend upon others 
to do their special work well and regularly we shall have to learn 
to do everything for ourselves. We thus lose the advantages of 
specialization. 

Honesty. The first element in dependableness is common 
honesty. Men who will not keep their word, fulfill their contracts, 



THE QUALITY OF THE PEOPLE 33 

or do business without cheating are not only morally odious, 
they are also obstructions to the progress and prosperity of the 
community. Perhaps this is why they are morally odious. A com- 
munity made up of such people, no matter how gifted they might 
be mentally, could scarcely prosper. No one could trust anyone 
else; consequently there could be no credit. Nothing could be 
bought or sold without the closest and most minute inspection, 
and this would be laborious and therefore wasteful of time. There 
could be no cooperation or teamwork, but everyone would have to 
look after himself and spend a great deal of time watching his dis- 
honest neighbors. Among the many advantages of honesty, there- 
fore, not the least is that it is a great labor-saving device when 
it is practiced throughout a community. 

Sobriety. Next to honesty, sobriety is probably the most 
important element in dependableness. In a rudimentary state of 
society, where each individual works and acts most of the time 
alone and where, therefore, there is little interdependence, drunk- 
enness may not be so vicious as it has now become. In our inter- 
locking civilization no personal habit or vice so unfits a man for 
usefulness as drunkenness. If you had to take your choice between 
riding behind a locomotive engineer who was addicted to drunken- 
ness and riding behind one who was addicted to any other vice, 
there is not much doubt as to which you would choose. If you 
had to take your choice between having chauffeurs on the street 
who were in the habit of getting drunk and having those who had 
formed any other bad habit whatsoever, you would not be likely 
to prefer the drunkards. 

Apply a similar test to anyone in any of the hundreds of re- 
sponsible positions (and all positions are coming to be responsible 
positions), and you will reach the conclusion that the person who 
is strongly addicted to drink is about the least dependable, and 
therefore the least desirable, citizen you can name. There are 
fewer places where he is of any use and more where he is a menace 
than is the case with the victims of almost any other vice. What- 
ever you may think when you are discussing, in the abstract, the 
relative harmfulness of various vices, you are not likely to be 



34 ELEMENTARY ECONOMICS 

much in doubt when you come to a concrete case like that of a 
locomotive engineer, a switchman, a driver of an automobile, or 
even a janitor or anyone else whose lack of dependableness might 
endanger your life. Sobriety must obviously rank high among the 
virtues which go to make up what we have called dependableness. 

Courage. Courage is the father of many virtues, as fear is of 
many vices. It is probable that as many falsehoods result from 
fear as from malice. In any kind of emergency you will want 
dependable companions who will not fail you. Their dependable- 
ness will be in proportion to their courage. Even your own courage 
may depend partly upon their courage, and theirs upon yours ; 
that is to say, when you feel that you can rely upon one another 
you will all feel more courageous and more capable of coping with 
a difficult situation than if each of you doubts the courage of the 
others. This applies not only to physical courage in a time of 
physical danger but to moral courage in times when the larger in- 
terests of society are at stake. Men of little courage fear to come 
out on the right side, and even men of real courage have their 
confidence shaken by the feeling that they cannot depend upon 
their fellow citizens. 

Fidelity. Fidelity is closely related both to honesty and to 
courage and serves much the same purpose. It is the quality which 
keeps faith even though one might gain some individual advan- 
tage by breaking faith. The habit of breaking faith or abusing 
confidence demoralizes a group or a community and makes any 
kind of effective teamwork impossible. 

There are doubtless many other elements which contribute to 
the dependableness of a people, but the four mentioned are the 
principal ones. Any group of people who possess these in high 
degree can rely upon and cooperate with one another and carry out 
any form of teamwork which they have the intelligence to plan. 
A community whose people are weak in any one of these four 
qualities will have difficulty in carrying out any effective scheme of 
group action, no matter how clearly they perceive the advantage 
of doing so. While these are moral qualities, nevertheless the 
economic prosperity of the nation depends upon them. They are, 



THE QUALITY OF THE PEOPLE 35 

therefore, of just as much interest to the economist as technical 
skill, good tools, good land, mineral resources, or any other factor. 

Reasonableness. Reasonableness is a noticeable characteristic 
of progressive people, as its absence is of unprogressive people. 
It includes freedom from prejudice, passion, and superstition, 
willingness to take a sensible view of things and to be guided by 
sound judgment rather than by passion, stubbornness, or gen- 
eral contrariness. It is opposed equally to the slavish following of 
old customs, on the one hand, and blind and headlong pursuit of 
new fads, on the other. It involves a frank recognition of all the 
necessary conditions of social life and teamwork and a willingness 
to submit to those conditions even at some inconvenience to self. 
It involves the willingness to help in any genuine reform movement, 
even at some inconvenience to self, and likewise a recognition of 
the necessary and legally constituted methods of effective reform. 

Teachableness. The first element in reasonableness is teach- 
ableness, or eagerness to learn, especially to learn better ways of 
doing the work which we have to do. Travelers among backward 
races give many strange accounts, not simply of the ineffective 
methods of work, which we might expect, but of the unwillingness 
of the people to learn new ways even when they are shown. One 
railroad builder who was forced to employ native laborers in a 
backward country, which need not be named, found that they 
were accustomed to carry all burdens on their heads. In moving 
dirt they insisted even on carrying it in boxes and various re- 
ceptacles on their heads. He supplied them with wheelbarrows 
and gave orders that they were to use these and nothing else. They 
used the wheelbarrows, but carried them also on their heads, and 
nothing could induce them to change their immemorial custom. 
No nation whose people are so unteachable as this is likely to 
become prosperous, or great in any sense, no matter how well en- 
dowed it may be with natural resources. 

This difficulty is not simply a lack of knowledge. It is more 
fundamental than that. It is a habit of mind which resists knowl- 
edge, which refuses to accept knowledge even when it is pre- 
sented. Whether this is due to some defect in the physiology of 



36 ELEMENTARY ECONOMICS 

the people or merely to bad teaching in the past it may be difficult 
to determine. That there are real differences of this kind among 
people there can be little reasonable doubt. A wise but strong 
ruler who would establish a system of compulsory education and 
enforce it rigidly could doubtless accomplish a great deal in the 
way of increasing the teachableness of the people. During their 
enforced schooling they would form the habit of learning, and the 
pain of a new idea would be greatly reduced. A wise majority 
in a democracy might do the same thing for an unwise minority. 
L Covetousness. There is another form of unreasonableness, and 
it is probably the most destructive of all, which takes the form of 
jealousy or resentfulness at the success of other people. It is the 
worst form, perhaps the only real form, of covetousness. There 
are few things which so deaden the enterprising and constructive 
spirit of a people as this form of resentfulness, and there are few 
things which so encourage that, spirit as a generous appreciation, 
on the part of everyone, of real achievement wherever it is found. 
Obedience to law. Another important element in reasonable- 
ness is the recognition of the fact that if we are going to live to- 
gether in groups it is necessary for each of us to submit to many 
regulations, some of them at times irksome, which would be 
unnecessary if we could live as isolated individuals. This is 
commonly called obedience to law. This need not be a slavish 
acceptance of all laws as they now stand, but it at least involves a 
recognition of the orderly and legally constituted methods of 
changing laws rather than a stubborn and brutal defiance of those 
which we do not happen to like. The purpose of law is not to 
repress or obstruct, but to make free — to release energy. The 
traffic policeman on a crowded street corner is a good illustration 
of all enforcement of law. He is not there to obstruct or hinder 
traffic, though he does undoubtedly hinder some unreasonable people 
from doing what they would like to do. But as the result of such 
hindrances, traffic can move more freely than it could without 
them, and thus the average person actually enjoys greatet freedom 
of movement than would otherwise be possible. A reasonable 
person always recognizes this fact and submits to such regulations. 



THE QUALITY OF THE PEOPLE 37 

The world has generally been dominated by peoples who were 
law-abiding. No nation whose people refused to submit to the 
necessary regulations could ever hope to grow prosperous or power- 
ful enough to play much of a part in civilization. It would be 
as reasonable to expect a disorganized mob, each individual of 
which followed his own whims, to succeed against a well-organized 
and well-disciplined army. The results of a lack of discipline 
come more quickly in war than in peace, but they are no more 
certain in the one case than in the other. It is particularly im- 
portant that this kind of reasonableness shall exist in a democracy. 
Under a despotism the subjects may be compelled by fear to sub- 
mit to regulations ; in a democracy their submission must be 
largely voluntary. In other words, it depends upon the reason- 
ableness of the people. 

Willingness to cooperate. Willingness to cooperate, where 
cooperation is desirable, even without legal compulsion, is a very 
important factor in the prosperity of any community. Even where 
everyone agrees that cooperation is needed it is frequently difficult 
to get people to cooperate for community work. The reasons 
are many, and some of them are hard to understand. Personal 
jealousies, old grudges, mutual distrust, and even general all-round 
meanness are given as the principal reasons. It is sometimes said 
that the lack of leaders is the great difficulty. It is quite as 
frequently the lack of followers. Everyone wants to be a leader 
and is not willing to follow anyone else. With such a spirit among 
the people the indispensable man is more likely to be the orator 
or the persuader than the statesman or the administrator. 
A people among whom the efficient man is popular will never be 
outstripped in the arts of peace or beaten in war by a people 
among; whom only a demagogue or even a persuasive orator can 
be popular. 

Heredity and training. A great deal has been written regard- 
ing the comparative importance of heredity and training in the 
determination of ability and character. Some have gone to the 
extreme of saying that heredity is everything, that a genius will 
always become a genius in spite of the lack of educational 



38 ELEMENTARY ECONOMICS 

advantages, — in short, that he will find his own means of education. 
Others have gone so far as to deny that heredity has anything to 
do with a man's ability ; they claim that it is all in his education, 
including under education all the influences which have been at 
work since his birth in developing his mind or shaping his char- 
acter. The truth, as in most such cases, seems to be somewhere 
between these extremes. There is no doubt whatever that men of 
average natural ability may be greatly improved by education and 
training, nor is there any reasonable doubt that some are capable 
of being trained much more highly than others because of a 
difference in natural ability. 

Early education can improve the present generation. What- 
ever may be said regarding the relative importance of the natural 
ability of the people and their training, it is absolutely certain 
that it is more important for the present generation to give atten- 
tion to the problem of its own training than to the problem of its 
own heredity. The latter cannot now be changed, and there is no 
use worrying about it. The only thing to do is to make the most of 
its inheritance and see .that it gets the best possible training. The 
only heredity we need to worry about is that of future generations. 

EXERCISES 

1. Is man superior to the brutes in every respect? In what re- 
spects does he excel them ? 

2. Is the civilized man superior to the savage in every respect ? In 
what respects is he superior? 

3. Do you consider those qualities in which the civilized man excels 
the savage as more important or less important than those qualities 
in which the savage excels the civilized man? Why? 

4. Of what advantage is forethought? How do men show fore- 
thoujht ? 

5. Of what advantage is dependableness ? Is it growing more im- 
portant? Why? How do men show dependableness? 

6. Of what advantage is reasonableness? How do men show 
reasonableness ? 

7. What are the principal factors in the improvement of the quality 
of a people ? 



CHAPTER V 
COMPETITION 

What is competition ? In the last chapter we considered the 
quality of the people themselves. We have next to consider some 
of their ways of doing things, their leading habits, customs, and 
institutions, in so far as these affect their prosperity. One of their 
noticeable ways is that which is known as competition. This 
refers to a way we have of striving, sometimes against one an- 
other, to get what we want. When there is one prize to be won 
and more than one person who would like to win it, there is 
pretty certain to be rivalry. If, in order to win it, one must do 
something useful rather than harmful, there will be rivalry in 
doing something useful. That is called competition. If, however, 
it may be won by doing something harmful rather than useful, 
there is likely to be rivalry in doing harm. This is not competition, 
but war or swindling or something of that kind. 

Why we compete. In no case is there competition except 
where there is scarcity. If there were enough prizes for everybody 
and they were all of the same desirability, there would be nothing 
for which to compete. But if there are not enough of the best prizes 
to satisfy everybody, there is pretty certain to be competition. 
We do not ordinarily compete for air because we all have enough. 
Where water is abundant we do not compete for it ; where it is 
scarce we do. 

The struggle for existence. It is a common error to speak of 
competition as though it were synonymous with war or with the 
struggle for existence as it is carried on among brutes. That 
competition is a form of conflict there can be no doubt, nor can 
it be denied that it is a phase of the all-but-universal struggle for 
existence. But there are many forms of conflict besides war, and 
there are many ways of struggling for existence without resorting 

39 



40 



ELEMENTARY ECONOMICS 



Methods of 

struggling 

FOR Existence 



to the destructive methods of brutes. The forms of conflict or 
the methods of struggling for existence may be classified as 

follows : 

'War 
Robbery 
' Destructive^ Dueling 
Sabotage 
^ Brawling 
Thieving 
Swindling 
Deceptive-^ Adulteration of goods 
False advertising 
^ Demagogy 

r Courting for royal favor 
' Political ■< Courting the sovereign people 
[, Campaigning for office 
f Polite social intercourse 

i 



Persuasive 



Erotic- 



Courting the opposite sex 
Commercial 



Judicial 



ialj 



r Adverdsing 
1 



Salesmanship 
'' Leaving it to the crowd " 
Lidgation before the courts 



Productive 



J Rivalry in producing goods 
1 Rivalry in rendering service 



Various forms of conflict. The methods named in the fore- 
going outline may be explained and illustrated as follows : By 
destructive methods are meant all those whereby one succeeds by 
virtue of one's power to kill, to hurt, or to inspire fear of physical 
injury or pain. "War," "robbery," "dueling," "sabotage," and 
"brawling" are names for methods of destruction as carried on 
by human beings. By the persuasive methods are meant all those 
methods whereby one succeeds by virtue of one's power tO persuade 
or to convince. One may beat one's rival by being a more per- 
suasive talker, whether one is striving for favors from the sovereign 
person or from the sovereign people, whether one is striving for 
the hand of a lady, the decision of a jury, or the trade of a pos- 
sible customer. By the productive methods are meant all those 



COMPETITION 41 

methods whereby one may beat one's, rivals or gain advantages 
by virtue of one's power to produce, to serve, or to confer benefit. 

The same persons may resort to more than one of these methods 
in order to gain an advantage. When two farmers compete in 
growing crops they are struggling for existence, or for economic 
advantage, by a productive method. When they quarrel over a 
line fence and take their quarrel before a court for settlement they 
are struggling by a persuasive method. When they secretly alter 
or remove landmarks in order to gain an advantage in their litiga- 
tion, or when they bribe jurors, they are struggling by a deceptive 
method. When they fall to fighting either with fists or with 
weapons they are struggling by a destructive method. 

When they change their methods in the order just described, 
they are sinking lower and lower in the scale ; that is, they are 
resorting to worse and worse methods of struggling for existence 
or advantage. When they rival one another in growing corn, there 
is more corn grown as the result of that rivalry. The country is 
better fed and everyone is better off, except possibly the one who 
is beaten, and even he may very likely be better off than he would 
have been if he had not competed at all. When two farmers quar- 
rel over a line fence and take it into court, no one gains any 
benefit except the lawyers, and what the lawyers gain the farmers 
lose. No new land is created by that conflict. No new wealth is 
produced. The community is no better fed, and the farmers have 
wasted their time. To change from persuasion to deception or 
from deception to physical force is so clearly to sink to a lower 
level that it is unnecessary to pursue the topic farther. 

Destructive and deceptive methods of brutes. It will be 
apparent to anyone who will study the diagram on page 40 that 
among animals the destructive and deceptive methods are the 
characteristic forms of struggle. They kill, maim, injure, rob, and 
deceive one another with no moral or legal restraints. They may 
sometimes rise to the level of persuasion, as in the courting process, 
but never to the level of production ; that is, no animal ever tries 
to beat its rival by producing a larger or better product or 
rendering a greater or better service. 



42 ELEMENTARY ECONOMICS 

Among human beings who have no moral sense and who are 
unrestrained by law and justice the destructive and deceptive 
methods of struggle will be followed as well as the persuasive and 
productive methods, but the destructive and deceptive methods 
are precisely the things that morals and laws are designed to pre- 
vent. In any civilization worthy of the name and under any gov- 
ernment worthy to stand overnight, men are actually restrained 
by their own moral feelings, by the respect for the good opinions 
of their fellows, and by the fear of legal penalties from attempting 
to promote their own interests by destruction or deception. 

Meaning of crime. To say that men are restrained from doing 
these things is not the same as to say that they are absolutely pre- 
vented. "Crime" is the name we give to destructive and deceptive 
methods of struggling, and it still flourishes, though the government 
is trying to stop it. We are trying to raise the struggle for existence 
to a higher plane than that on which it is waged in the subhuman 
world. The aim is to prevent destruction and deception and to 
compel men to succeed, if they succeed at all, by persuasion or 
production. There are, however, some more or less refined methods 
of deception which have not even been declared illegal by legis- 
lation. If we can so improve our legislation as to prohibit every 
form of deception as well as destruction, and if we can so improve 
our executive and judicial systems as to prevent absolutely the 
violation of law, we shall have reached the ideal of government 
control over the struggle for existence. 

Is it wrong to compete ? There are a few people who object 
on principle to all forms of competition, who believe that the 
whole competitive system is morally wrong. This feeling, however, 
is probably due to a failure to discriminate, as we have tried to 
do in the preceding pages, between different kinds of conflict. 
The horrors of war and other forms of destructive conflict, the 
petty, skulking meanness which accompanies all forms of decep- 
tive conflict, and even the jealousies and heartburnings which 
result from many forms of persuasive conflict have so impressed 
certain sensitive spirits as to cause them to revolt against the 
very idea of competition in any form. Such people ought never 



COMPETITION 



43 



to play croquet, because there is competition even there. An 
election, moreover, is as truly competitive as any form of business. 

Universality of struggle. During the entire life of man on 
this planet he has had to struggle in one way or another against 
a multitude of enemies, human and nonhuman. The reason why 
we are here today is because our ancestors were successful in their 
struggles. They succeeded in living and reproducing their kind 
in spite of all the enemies and dangers which surrounded them. 
One reason why they struggled so successfully was that they were 
valiant enough to wage their fight with vigor and with spirit. That 
spirit we have inherited to such an extent that we cannot even 
amuse ourselves without some kind of competition or struggle. 
That is why most of our games are competitive. Competition is 
as the breath of life to our nostrils. It will be well for us if we 
can harness this spirit to productive work rather than allow it to 
waste itself in destruction, deception, or even in some fruitless 
kinds of persuasion. The nation which succeeds best in harnessing 
this spirit to production is the nation which should normally grow 
rapidly in wealth, prosperity, and power. 

The spirit in which one competes. In assuming the universal- 
ity and permanence of competition in some form it is not necessary 
to exclude such things as love, friendship, neighborliness, and 
cooperation. Competitors in a friendly game may be none the 
less friendly because they are competing. It is only when they 
care more for victory or the prize of victory than they do for 
friendship that competition interferes with friendship. This can 
be cured, however, not by abolishing competition but by learning 
to care for the right things and to evaluate them properly. 

When men care more for money, which is the immediate prize 
of economic competition, than for honor, friendship, or justice, 
then competition is likely to be ruthless and destructive. When men 
care more for offices, the immediate prizes of political competition, 
than for the welfare of the country or the peace of the neighbor- 
hood, a political campaign is likely to become a ruthless and de- 
structive game. And when football men care more for victory than 
for sport or honor, football becomes a game unfit for gentlemen. 



44 ELEMENTARY ECONOMICS 

In all these cases the evil is not in competition itself but in the 
false system of valuations in the minds of the competitors. So 
long as business men realize that there are other things more pre- 
cious than money, so long as politicians realize that there are 
other things more important than winning offices, so long as foot- 
ball men realize that there are other things greater than victory, 
all these forms of competition are thoroughly compatible with 
the most sincere friendship. 

We must conclude, therefore, that there is nothing wrong in 
competition in itself, otherwise most games would have to be con- 
demned. It is wrong and uneconomical, however, to try to gain 
one's ends by destructive or deceptive methods. Moreover, to do 
so is contrary to law. We are permitted by law to compete by 
the methods of persuasion and production. It is especially 
economical for everyone to compete in production or in the 
performance of service. The more universally our people com- 
pete in production, and the more strenuously they compete, the 
more production and the better service we shall have and the 
better off everybody will be. Competitive bargaining, which is a 
kind of persuasion, sometimes works well and sometimes badly. 
It works badly, however, mainly when someone has a great ad- 
vantage over another in the bargaining process. When the advan- 
tages are equalized even competitive bargaining usually works 
well, unless it begins to verge on deception. 

EXERCISES 

1. What is meant by competition? 

2. Why do we compete? 

3. What is meant by destructive methods of struggling for exist- 
ence ? Are such methods legal among civilized men ? 

4. What is meant by deceptive methods ? 

5. What is meant by persuasive methods? Are such methods legal 
among civilized men? Ought they to be? 

6. What is meant by productive methods ? Are such methods legal 
among civilized men? Ought they to be? 

7. What, if any, of the above methods do you approve? Why? 

8. Does the spirit in which one competes make any difference? 



CHAPTER VI 
COOPERATION 

Prevalence of cooperation. In the midst of all the competition 
that is going on there is a great deal of cooperation. That is true 
even of the brutes in their brutal struggle for existence. There is 
much mutual aid, much working together for a common end, es- 
pecially among the gregarious animals. They will unite for mutual 
defense or mutual attack, they will play together, though much of 
their play takes the form of practice for attack or defense, and 
they frequently act in unison through sheer friendliness with no 
apparent competitive or warlike purpose. All this is true in still 
greater degree of human beings, especially the more civilized. 

Meaning of cooperation. Cooperation may be defined as 
consciously working together for a common end. When a number 
of persons work consciously together to accomplish a given pur- 
pose, with no element of personal rivalry, or, if it exists, with the 
element of personal rivalry kept out of sight, there is said to be 
cooperation. This is a way of doing things which must be taken 
account of in any general study of the conditions of national pros- 
perity. It has many advantages, but it is by no means so general 
as competition. 

Cooperation a form of competition. Cooperation, as it is gen- 
erally practiced, is only a method of competing more effectively. 
There is cooperation among the members of an athletic team. 
Their teamwork consists in working together smoothly and ef- 
fectively, but the purpose of this teamwork, or cooperation, is to 
enable them to compete more effectively against the opposing team. 
It would be difficult to find or to name an instance of cooperation 
which did not, directly or indirectly, enable the cooperators to 
compete more successfully than they were able to do when work- 
ing alone as individuals. Cooperation in business is really the 

45 



46 ELEMENTARY ECONOMICS 

principle of teamwork applied to business competition. Within the 
cooperating group, as within the athletic team, competition among 
members is reduced. But competition between cooperating groups, 
or between the group and those outside the group, is quite as 
sharp as it would be if there were no cooperative groups. Again, 
when a cooperative group becomes large there arises within the 
group a certain amount of competition for offices and other 
advantages. 

Cooperation is an excellent thing under certain conditions, and 
wherever the conditions call for it every reasonable effort should 
be made to encourage it ; but the encouragement should be given 
with a full understanding of its limitations and of its real relation 
to the competitive process. More cooperative societies have failed 
than have succeeded. One of the principal reasons for failure has 
been that the promoters have imagined that there was in coopera- 
tion something inherently superior to competition and that it 
ought to be substituted for competition anywhere and everywhere. 
The truth seems to be that cooperation is called for only under 
certain special conditions where teamwork is required in order to 
secure large results. 

Where cooperation is successful. A careful study of co- 
operation will show that it has seldom succeeded in the field of 
production. Its chief successes have been achieved in merchandis- 
ing ; that is, in buying and selling. Except among a few religious 
societies, which are held together by a powerful religious senti- 
ment, the author does not know of a single case where cooperative 
farming has succeeded. By cooperative farming is meant the run- 
ning of the productive work of growing crops under a cooperative 
system. There are many cases, however, in which groups of 
farmers have cooperated in buying and selling, in marketing their 
products, in purchasing their supplies, and in securing capital on 
advantageous terms. There are also many cases in which they 
have cooperated in running creameries, cheese factories, and 
grain elevators. These are parts of their marketing system. Again, 
it must be remembered that the farmers do not themselves operate 
these establishments. They own them and they furnish the capital 



COOPERATION 47 

to run them, but they hire others to manage them and to do the 
work. The men who work in these establishments are not co- 
operators, but receive wages and salaries precisely as they would 
if the establishments were owned by private individuals. 

Two fields of business competition. There is a fundamental 
reason why cooperative enterprises have not flourished in the 
field of production as often as they have in the field of buying 
and selling. This reason is found in the two kinds of business 
competition, — competitive production and competitive bargaining. 
Competitive production means rivalry to see who can produce the 
largest and the best product ; competitive bargaining means trying 
to get the better of a bargain. Competitive production always 
works well ; competitive bargaining sometimes works well and 
sometimes badly. Since competitive production always works well, 
there is no advantage in changing to cooperative production. No 
one has a sufficiently strong motive to induce him to give his time 
and energy to the running of a cooperative society in the field of 
production. Since there are no evils connected with competitive 
production, there is not enough to be gained by cooperative pro- 
duction to lead anyone to sacrifice his time and effort in order to 
make it succeed. 

In the field of competitive bargaining, however, evils frequently 
spring up. Where a small and compact body of dealers are buying 
from a large and widely scattered body of producers the latter are 
at a great disadvantage' in the bargaining process. Where this is 
the case it is necessary for the producers to get together in a 
cooperative organization in order to bargain on equal terms with 
the dealers. Where there is such a need as this someone may have 
a motive that is sufficiently strong to induce him to give his time 
and attention, to sit up nights, to labor in season and out of 
season, to keep the cooperative society together and make it suc- 
ceed. Without some such motive as this, cooperation has seldom 
or never succeeded. 

Competitive consumption. There is another kind of competi- 
tion which always works badly. It is even worse than competi- 
tive bargaining. It may be called competitive consumption. By 



48 ELEMENTARY ECONOMICS 

competitive consumption is meant a rivalry in display, in ostenta- 
tion, in the effort to outshine or to outdress all one's neighbors or 
at least not to be outshone or outdressed by them. This is not 
business competition, however, though it can be called a kind of 
economic competition. 

Various forms of economic competition. From what has been 
said it will appear that economic competition is not synonymous 
with the productive methods of struggling for existence as out- 
lined in the beginning of the preceding chap-ter. There is such 
a thing, it is true, as competitive production, but competitive bar- 
gaining is partly persuasive and partly deceptive. It is persuasive 
when it takes the form of clever advertising, of expert salesman- 
ship, or of shrewd and reasonably honest bargaining ; it is decep- 
tive when cleverness in advertising takes the form of artistic lying 
(of overstating the merits of an article advertised) or when expert 
salesmanship takes the same form. 

Competitive consumption has no productive features about it. 
The effort to keep up appearances, to dress better than one can 
afford, to spend money for purposes of display, are all deceptive, 
besides being wasteful and to that extent destructive. These, 
however, are among the more refined and less repulsive forms of 
destruction. For this reason, perhaps, neither law nor public 
sentiment has condemned them very definitely as yet. 

In what fields cooperation may succeed. They who are in- 
terested in promoting cooperation should bear all this in mind. 
It is a waste of time and energy to try to substitute cooperation 
for competition in all cases. In the first place, it cannot be done, 
because so long as people show a preference for themselves and 
those who are near them, as against others who are farther from 
them, competition in some form will exist. In the second place, 
even if cooperation could be substituted for competition, it would 
be undesirable in many cases, though desirable in others. That 
is to say, there are some cases in which competition works so well 
that cooperation could not improve upon it. To be more specific, 
competitive production, as stated before, always works well. No 
one has yet succeeded in making cooperation in production, either 



COOPERATION 49 

on a large scale or on a small scale, work successfully for a long 
period of time. 

This is not saying that producers may not occasionally co- 
operate, as when farmers help one another in special lines of 
work. In our rural communities, especially in previous generations, 
there were many barn raisings, log rollings, corn huskings, and 
other examples of genuine and beneficial cooperation. But these 
events were only incidents in a kind of life which remained, in 
spite of them, predominantly competitive. 

Even competitive bargaining sometimes works well. Where 
this is the case nothing is to be gained by cooperation, and it is 
therefore certain to fail, because the cobperators will sooner or 
later lose their enthusiasm when they see that they are not gaining 
anything by it ; that is, when they see that it is not working any 
better than competition. The would-be cooperators should choose 
for their field of effort some situation where competitive bargaining 
is working badly. There they will have a chance of success. But 
no cooperative scheme runs itself. Even where there is a distinct 
and undoubted need for it, it will succeed only when some capable 
person gives a great deal of time and study and hard work to it. 

Compulsion versus voluntary agreement. With an unerring 
instinct for economic error a certain class of writers have per- 
sistently obscured this question of cooperation versus competition 
by confusing it with the question of working under compulsion 
versus working under freedom of contract. The Panama Canal was 
not built cooperatively. The government of the United States 
decided to hire others to do it instead of bargaining with con- 
tractors. All who did the work did not cooperate, any more than 
the men who build our railroads and factories or work on our 
streets. If a large number of farmers unite to run a creamery or 
a shoe factory of their own, but do not work in it themselves, they 
sometimes call it a cooperative creamery or shoe factory. In 
reality it is only quasi cooperative. The people who do the work 
in the factory are hired and have no more to say about the man- 
agement than they would have if the factory were owned by an 
ordinary joint-stock corporation. 



50 ELEMENTARY ECONOMICS 

.A cooperative shoe factory, of the class which we are now dis- 
cussing, is merely an organization of consumers formed for the 
purpose of bargaining for shoes for its individual members more 
successfully than they could do individually. It finds that it can 
bargain directly with workingmen, tanneries, and others to better 
advantage than it can bargain with private owners. 

Cooperation in setting standards of consumption. There is 
always an acute need for a kind of cooperation that can stop 
competitive consumption. Unfortunately that need is not very 
widely understood. One reason why it costs us so much to live 
is that we are always trying to keep up with someone else. 
"It takes all my income,'^ said a certain congressman, "to keep 
up with my fool neighbors." He was expressing in this picturesque 
manner one of the profound facts of our economic life.^ The 
things which cost us so much money are not the things which we 
prize for their own sakes, but the things which we feel that 
we must have because our neighbors have them. The indi- 
vidual finds himself almost helpless. "As well be out of the 
world as out of style " is a saying which pretty well sums up the 
situation so far as the individual is concerned. But a large group 
of people who would cooperate in the work of setting their own 
styles need not be either out of style or out of the world. Edu- 
cated people who understand this principle should take the lead. 
In so doing they would not only be doing themselves a favor, but 
they would be conferring a priceless benefit upon the whole nation. 

EXERCISES 

1. What is cooperation? 

2. How is it related to competition? 

3. Is it inherently better than competition? Why? 

4. Is it always successful? 

5. Under what conditions is it most likely to succeed? 

6. Has cooperative production often succeeded? Why not? 

7. What is meant by competitive consumption? 

1 Compare also Irving Bacheller's book entitled " Keeping up with Lizzie." 



CHAPTER VII 
LAW AND GOVERNMENT 

The need for law. One of the most important of the things 
which the people do in order to achieve prosperity is to maintain 
a government to make and enforce law. Law and government have 
a most important part to perform in promoting the prosperity of 
the people. Bagehot^ has said that the first great need of primi- 
tive man is for law, — definite, concise law. He even argued that 
it is more important that the law be definite and concise than 
that it be just, though both are of very great importance. 

It is probable that a system of laws which are well understood 
because they are clear and concise and which are regularly en- 
forced without variation or favoritism, even though they are in 
some respects unjust, is better for a people than a system of laws 
which are in essence just, but which are not clearly understood 
and not regularly and impartially enforced. When everyone knows 
definitely what the law is, and knows definitely that it will be en- 
forced not only against him but equally in his defense, he at least 
knows what he can count upon. Nothing so discourages industry 
and enterprise as uncertainty as to what other men are likely 
to do, and uncertainty as to what government officials will do is 
one of the worst forms of uncertainty. When a legal regulation is 
universally and accurately enforced it begins to work like a law 
of nature. We never care to inquire whether the law of gravita- 
tion is just or not. We know that it is unavoidable and calculable, 
and therefore we manage to adjust ourselves to it most of the 
time. 

The problem as to what the government can do, through its 
laws and its administration, for the promotion of the economic 

1 "Physics and Politics" (fifth edition), p. 21. London, 1879. 
51 



52 ELEMENTARY ECONOMICS 

prosperity of the people is of the very greatest importance. The 
specific aim should be to call out the very best and most productive 
efforts of every individual. Since the greatest resource of any 
nation is the productive energy of the people themselves, it fol- 
lows that the conservation and development of that productive 
energy is the most constructive policy that any government can 
pursue. It also follows that the worst form of waste that any 
government could permit or encourage would be the waste of the 
productive energy of the people. 

The repression of destructive and deceptive action. The 
first and most obvious thing which the government must do is to 
prohibit and prevent all the destructive and deceptive forms of 
conflict as outlined in Chapter V. He who has no moral scruples 
against pursuing his selfish interests by destructive or deceptive 
methods can be restrained only by the superior force of the many 
as it is exercised through the government. If he is allowed to 
pursue his selfish interests by these methods, he not only wastes 
his own powers in unproductive efforts but also tends to destroy 
the products of other people, and, what is more important, he 
discourages them from further productive effort and thus causes 
their productive powers to go to waste. It may therefore be said 
that, whatever other functions government may have, its primary 
function is to repress the destructive and deceptive methods of 
pursuing self-interest. 

The repression of violence and fraud. The first effect of this 
repression of the destructive and deceptive methods is to transform 
the struggle for self-interest from the brutal struggle for existence, 
where the strong prey upon the weak and the ferocious upon the 
gentle, into a struggle wherein the persuasive and the productive 
triumph over the unpersuasive and the unproductive. In so far as 
competition can be made a rivalry in production, and success can 
be made to depend upon production, we shall be approaching a 
condition in which each and every one would succeed in getting 
what fee wanted in exact proportion as he contributed to others 
what they wanted ; under which the most useful would be the most 
su€ce§sM, and tht indispensable man would be the great man. In 



LAW AND GOVERNMENT 53 

that situation we should have a literal fulfillment of the words 
"Whosoever will be chief among you, let him be your servant." 
And a servant is not necessarily one who comes at your beck and 
call to do your bidding ; he may be merely the one who does you 
a service or who produces what you need. 

It must not be hastily assumed that the repression by the gov- 
ernment of the destructive and deceptive methods of acquiring 
possession of desirable things is merely negative work. By this 
kind of repression every producer is protected in the possession 
and enjoyment of the fruits of his own productive effort. Know- 
ing that he will enjoy the full advantage of his own industry, enter- 
prise, and foresight, he will have the strongest kind of motive for 
exercising these virtues to their full capacity. This lets loose the 
productive energy of the people in a way that would be impossible 
without the protection of law and government. The people can 
be trusted to take the initiative and start all sorts of productive 
enterprises if they are thus safeguarded. 

There is nothing any more positive and constructive than the 
free spirit of a vigorous race of people when they are left to direct 
themselves in the field of production, but are restrained from 
entering the fields of destruction and deception. They can safely 
be intrusted with the task of looking after themselves if those who 
are criminally inclined can be prevented from interfering with 
them. Give the people confidence in the government and in one 
another, and their own productive virtues will develop, their 
industrial power will multiply itself, and the prosperity and power 
of the nation will be assured. 

Confidence and economy. Confidence is one of the greatest 
of all economizers of human energy. Its greatest value is not in 
the stability which it brings to the financial market, though that 
is very important ; it is found rather in the unshackling of enter- 
prise which results from confidence in the government and in one's 
neighbors and fellow citizens. The average citizen has more points 
of contact with his neighbors, his associates in business, and his 
fellow citizens than with the government or the financial market. 
It is in these numerous points of contact, and in the vast sum of 



54 ELEMENTARY ECONOMICS 

these dealings of man with man, that confidence produces its 
greatest economies and lack of confidence its greatest waste. 

Professor E. A. Ross, in his book entitled "The Changing 
Chinese," mentions certain bad neighborhoods in China where the 
farmer must guard his rice field every night to keep his crop from 
being destroyed or stolen. The energy that is wasted when so 
many people stay awake every night must be stupendous, but this 
waste is a trifling matter compared with the discouragement and 
lack of enterprise that result from the feeling of uncertainty which 
such lawless conditions beget. We save much energy by being 
able to sleep at night in confidence that the products of our labor 
will not disappear before morning. 

Before we expend too much sympathy on those Chinese farmers 
we should consider the condition of the fruit growers, gardeners, 
and farmers in the neighborhood of some of our large towns who 
are frequently compelled to keep a watchman or else to expose the 
entire produce of their toil to the depredations of town marauders. 
The depredations of these marauders are especially disastrous to 
the family garden, where the owner cannot afford to hire a watch- 
man and is himself engaged in other work which makes it neces- 
sary for him to sleep at night. 

Observance of law a patriotic duty. There are two reasons 
for choosing the orchardist and the gardener as examples of pro- 
ducers who gain through a government and a community in which 
they have confidence. In the first place, it is obvious that these 
men are producers who contribute certain vital necessities to the 
prosperity and well-being of the whole community. In the second 
place, it ought to be easy for the average person to understand 
that any act of his which makes it uncertain as to whether or 
not the producer will reap the reward of his labor is an injury not 
only to the producer but to the consumer and to the whole nation 
as well. 

Standardization and economy. Aside from police protection 
there are a few other important functions which law and govern- 
ment can perform better than private individuals or voluntary 
groups of individuals. One of the most important of these is the 



LAW AND GOVERNMENT 55 

standardizing of coins, weights, and measures. The economy in- 
volved in transferring coined money instead of uncoined metal 
is apparent. Coining the metal by a reliable and responsible 
government merely gives the public confidence in its weight and 
fineness. When it is once coined it can pass from hand to hand 
without the labor of inspection on the part of everyone who re- 
ceives it. Otherwise the receiver would always have to weigh it 
to determine its quantity and test it to determine its quality. 
When it is coined it "sells" (if we may speak of seUing money) 
on grade and reputation rather than on inspection. Confidence 
is what makes it sell on grade and reputation ; lack of confidence 
would necessitate inspection, — that is, weighing and testing, — 
which would be very wasteful of time and labor. 

Any other commodity may also sell on grade and reputation 
rather than on inspection, if it is properly standardized. This 
also would be economicar and, as in the case of coin, would be a 
result of confidence. AH civilized governments have done some- 
thing toward standardizing weights and measures for determining 
quantity. In proportion as these standards are fixed and enforced 
by law we save time and energy in transferring goods. If it were 
possible to go farther and fix and enforce standards of quality as 
well as of quantity, still greater economies would be effected. 

Individuals and firms have frequently succeeded in standardiz- 
ing their goods, both as to quantity and as to quality, so effec- 
tively that buyers can buy on grade and reputation rather than 
on inspection. Most goods which are put up in standardized 
packages and always sold in this form are sold on grade and not 
on inspection. Whenever individuals and firms succeed in in- 
spiring such a degree of confidence they generally increase the 
salability of their goods. They save the purchaser some time and 
trouble, and he is usually willing to pay something for that saving. 
Only the government, however, can enforce uniform standards 
among all producers and all dealers. 

Standardization and specialization. When each individual 
can avoid the necessity of being expert in many things, and there- 
fore has time to become a specialist in one thing, the general 



56 ELEMENTARY ECONOMICS 

efficiency of the whole nation is increased. One of the advantages 
of standardizing commodities is that the average consumer can 
save himself the trouble of being an expert buyer or an expert 
judge of the many things which he has to purchase. If he has 
confidence not only in the weights and measures but also in the 
alleged quality of the goods offered for sale, he may make his pur- 
chases with very little expenditure of time and strength and save 
his time and strength for his own special work. 

The enforcement of contracts and agreements is another way 
of creating confidence and, through the creation of confidence, of 
economizing energy and encouraging production. Where men com- 
monly regard contracts as scraps of paper and do not solemnly 
and completely fulfill them, and where law and government fail 
to compel their literal fulfillment, there will, of course, be great 
difficulty in working together in productive enterprises. 

The exercise of authority. It is clear, therefore, that one 
very important function of government is to create that state of 
confidence which results in economy, and to create it, first, by 
repressing destruction and deception through the police power of 
the state ; second, by standardizing products ; and, third, by en- 
forcing contracts. These tasks, which are necessary in the interest 
of the highest economy, are thrown upon the government because 
no other agency is in a position to perform them. Xbey^ call for 
the exercise of authority, backed up by physical force, and that is 
a work which can be intrusted to no private agency. '^~"~ ~^ 

We need not limit the functions of government, however, to 
those requiring the exercise of authority, although usually it will 
be found that the government is best fitted to perform those which 
require some degree of authority, whereas private individuals and 
organizations can usually be intrusted with those enterprises which 
can be carried out wholly on the basis of voluntary agreement. 
This distinction is not always clear, but a little careful study will 
usually reveal the fact that there is an element of compulsion in 
those enterprises which the government carries on most suc- 
cessfully. However, we need not hold to any hard-and-fast defini- 
tion of the functions of government. It is sufficient to say that 



LAW AND GOVERNMENT 57 

anything is a proper task for the government if there is reasonable 
ground for beHeving that the government can do it better and 
more economically than private enterprise can reasonably be ex- 
pected to do it. That reasonable ground exists in favor of govern- 
ment enterprise whenever authority or compulsion is necessary to 
its successful accomplishment. When there is no need whatever 
for compulsion — that is, when every part of the work, including 
the selling of the product, can be conducted on the voluntary 
basis of free contract — the general tendency is to leave the task 
to private enterprise. 

Beneficent uses of power. There is a wide difference, however, 
between using force to compel a man to do something which he 
has voluntarily contracted to do and using it to compel him to do 
something which he has never agreed to do and would prefer not 
to do. As a matter of observation it will be found that most if 
not all of the things which the government is able to do well in- 
volve some element of compulsion of the latter kind. Public edu- 
cation will serve as an example. Wherever it is a success there 
is either compulsory attendance or compulsory support by taxa- 
tion or a combination of both. In the lower grades of our public- 
school system we have both. In the higher grades and in our 
state colleges and universities we have compulsory support; that 
is, the taxing power of the government is used to procure the 
means for the payment of expenses. Both compulsory attendance 
upon the lower grades and compulsory support of all grades are 
beneficent uses of the physical power of the government over the 
individual ; but it must be remembered that it is the use of 
physical power. There is no reason for believing that a govern- 
ment school on a purely voluntary basis would be superior to a 
private school ; that is to say, if both attendance and payment 
were voluntary on the part of individuals, it is difficult to see how 
it could be more successfully managed by the government than 
by some private agency. 

That which is true of public education appears to be true of 
every other enterprise upon which it would be possible for the 
government to enter, The government has no advantage over a 



58 ELEMENTARY ECONOMICS 

private individual or a voluntary association of individuals except 
in the use of force or compulsion ; that is to say, any enterprise 
which can be carried on, on a purely voluntary basis, without any 
use of compulsion except in the enforcement of contracts which 
are themselves voluntarily entered into, can probably be fully as 
well managed by private individuals and associations as by the 
government ; but if any degree of compulsion is necessary in 
order to insure its success, it becomes a subject for government 
enterprise. There is undoubtedly a large field for the benefi- 
cent exercise of compulsion. There is also a large field where 
freedom and voluntary agreements are better than compulsion. 
If we can locate the limits of the beneficent exercise of force 
we shall have located the limits to the beneficent exercise of 
government enterprise. 

Human interests sometimes in conflict and sometimes in 
harmony. Human interests are frequently in conflict with one 
another. They are also frequently in harmony with one another. 
Where they are in conflict — that is, where one person's interest 
conflicts with that of another — there is likely to be trouble. Only 
three things can prevent uneconomic conflict; that is, conflict 
which is either destructive or deceptive. The first is the voluntary 
submission of the weaker person through fear. That results in 
despotism. The second is such moral self-restraint on the part 
of one or both as will prevent a quarrel. Willingness to give up 
not only one's coat but one's cloak also would preserve peace. The 
third is a strong and effective umpire who will promptly decide 
the case and enforce his decision upon both parties to the conflict. 
This umpire is the government. 

It will generally be agreed, except by extreme anarchists, that 
whereyer human interests come in conflict, a strong umpire of 
some kind will be necessary until men are so self -restrained by 
their morals or their religion as to govern themselves. Without 
such self-restraint the conflict of interests will result in the wast- 
ing of human life and energy by destructive combats, fights, and 
duels, unless there is a government at hand to settle the difference 
and send the disputants about their business. 



LAW AND GOVERNMENT 59 

Government control unnecessary where human interests are 
in harmony. But human interests are sometimes harmonious. 
When this is the case the individual who pursues his own interest 
is also promoting the interest of others. Within this field where 
interests are in harmony it is true, as Adam Smith said long ago, 
that we are sometimes led as by an invisible hand to promote 
the public interest while trying to promote our own.^ It is to the 
interest of the farmer to grow good crops ; it is likewise to the 
interest of the public to have him. do so. In this and a vast 
multitude of other cases the individual needs no compulsion 
to lead him to promote the public good. In, all such cases it 
seems to work better in the long run to leave the individual very 
much to himself. The wise government will generally keep its 
hands off. 

Tendency of government officers to increase their own power 
and importance. There is, however, a natural tendency in all 
human beings to wish to magnify their own power and importance. 
This tendency seems to be peculiarly strong in that kind of 
person who manages to get elected to public office. Modesty is 
not the outstanding characteristic of the average candidate who 
seeks office, though he may feign it pretty well. The more the 
government undertakes, the greater becomes the power and im- 
portance of the officeholder. There is, therefore, a strong tendency 
on the part of all officeholders to extend the functions of govern- 
ment. The arguments in favor of this policy, as used by the 
elected, are sometimes so subtle as to deceive the very elect. They 
are always made as though in the interest of the people, though 
they are really in the interest of the officeholding class. It is a 
means of exalting the position of the vote getter. It therefore be- 
hooves the average citizen who has no ambition for public office to 

1 He generally, indeed, neither intends to promote the public interest, nor 
knows how much he is promoting it. . . . By directing his industry in such 
a manner as its produce may be of greatest value, he intends only his own 
gain, and he is in this, as in many other cases, led by an invisible hand to 
promote an end which was no part of his intention. ... By pursuing his own 
interest he frequently promotes that of society more effectually than when he 
really intends to promote it. — " Wealth of Nations," Book IV, chap, ii 



6o ELEMENTARY ECONOMICS 

study very critically all arguments favoring the extension of the 
functions of the government. 

The incompetent. There is, however, the problem of the people 
who are not competent to pursue intelligently either their own 
interest or the public interest. The feeble-minded, the insane, and 
the immature who have no natural guardians must of course haye 
their interests looked after and cared for by the government. With 
them it is not a question of the conflict or harmony of their 
interests with those of the public ; it is a question of their 
competence to pursue even their own interests intelligently. 

The individuaPs wisdom is not increased suddenly when he 
is put into public office. Is anyone really competent to pursue 
his own interest intelligently? This question is sometimes asked 
by those who think that the government should look after us all. 
The statement that men are not competent to pursue their own 
interests does not furnish a very convincing argument in favor 
of general care and supervision by the government, for the rea- 
son that it goes too far. \If no one is competent to look after his 
own interests, how can he possibly be competent to look after the 
interests of the rest of mankind? The officeholder is merely a 
man or a woman like the rest of us. If we are not able to look 
after ourselves, neither is he nor she able to look after himself or 
herself, much less to look after the rest of us. 

Because of such considerations as these, the wisdom of mankind 
has for centuries moved toward the conclusion that government 
should confine itself mainly to the control of the field where in- 
dividual interests come in conflict, leaving mature people of sound 
mind to govern themselves wherever and whenever their interests 
are harmonious. There are occasional reactionary tendencies 
toward more government interference, but these are usually 
encouraged by those whose ability lies in the direction of vote 
getting rather than by those whose ability consists in the power 
to do the useful and necessary things. It is no accident that 
talkers are frequently in favor of government regulation of every- 
thing except their own business of talking. They are generally 
opposed to any governmental interference with their own business. 



LAW AND GOVERNMENT 6i 

EXERCISES 

1. Why do we need law? 

2. Why is it so important that law be definite and concise? 

3. What forms of conflict must the government suppress? 

4. Suppose that no one could succeed in life except in proportion 
as he did useful things, would that be a fulfillment of the words 
''Whosoever will be chief among you, let him be your servant"? 
Who is your servant? 

5. What is the relation between confidence and economy? 

6. What is the advantage of having money of standard quaHty? 
Would there be a similar advantage in standardizing other things? 

7. Is every increase of power by the government necessarily good? 

8. What are some of the things which every government must 
do if it is to promote prosperity? 

9. Does a government tend to increase or to decrease its own 
authority ? Why ? 

10. Do people who are at other times incompetent become suddenly 
competent when they go to the polls to vote? 

11. If people are generally incapable of taking care of themselves, 
are they likely to be capable of electing officials who can take better 
care of them? 

12. If the average man is incapable of taking care of himself, is 
the average government official likely to be capable of taking care of 
himself, to say nothing of taking care of the rest of the people ? 



CHAPTER VIII 



MORALS AND RELIGION 



It was suggested in a former chapter that the prosperity of a 
nation depended more upon the economizing and utilizing of its 
fund of human energy than upon any other factor, and that in 
consequence the most destructive forms of waste were those which 
wasted or dissipated portions of that fund. When a man's energy 
is going to waste, his life is going to waste, and he becomes a drain 
upon, rather than an addition to, the national strength. The 
following outline indicates some of the more familiar > ways in 
which men go to waste. 

• Ji / Involuntarily (the unemployed) 
\ Voluntarily (the leisure class) 



People who go 
TO Waste 



^, . „ , , f Through lack of training 
The ineffectively I ^, , , , ^ . 

, - < Through lack of opportunity 
employed I , , , , ^ . . . . 

t_ Through lack of initiative 

'Wasting their J In vice 

own energy tin dissipation 
The harmfully f By crime 

employed Wasting the en- 
ergy of other 
people 



By fraud 
By luxury 
By bad investing 
L By false teaching 



For some of these forms of waste, law and government alone 
can furnish the remedy. Whenever force or compulsion is neces- 
sary and, at the same time, effective, government can and should 
use the force of positive law, supported by penalties. But there 
are many forms of waste which cannot be remedied by force or 
compulsion, at least not without causing greater waste of other 
kinds. To try to control by law such things as laziness, private 
vices, luxury, false teaching, and many other wasteful and harmful 

62 



MORALS AND RELIGION 63 

tendencies would require an intolerable amount of espionage and 
meddling. The waste from espionage and meddling might easily 
overbalance the waste from the bad habits which the laws were 
trying to control. In all such cases we must fall back upon 
morals and religion to induce self-restraint and the voluntary 
adoption of sound habits. 

Can morality be taught ? There are two conflicting theories 
as to the results of moral teaching : one is that such results are 
generally negligible, because moral habits are the result of eco- 
nomic and social surroundings ; the other is that man's moral 
nature may be so developed by teaching and example as to render 
it proof against bad economic and social conditions, — that these 
conditions are more likely to be the result than the cause of the 
moral habits of the people. The truth seems to be found in a 
combination of these two theories. We are undoubtedly influenced 
by our surroundings, but we can also by sheer force of character 
not only resist but even overcome and change our surroundings. 

Weak characters are more largely controlled by their surround- 
ings than are strong characters. Two men may go under a cold 
shower bath. One, being in vigorous health, comes out feeling 
refreshed. To him a cold shower is a favorable rather than an 
unfavorable condition. The other, being weak to begin with, comes 
out with a chill. To him it was an unfavorable rather than a 
favorable condition. Yet it was the same shower bath, with the 
same temperature. If one were studying jellyfish, one might find 
that they were the sport of such circumstances as the winds, the 
waves, the tides, and the ocean currents ; but if one were studying 
sharks, one might, with equal certainty, find that they were in- 
dependent of all such circumstances. Similarly, if one were study- 
ing human jellyfish, one might find them and their moral habits 
to be the result of their economic and social surroundings ; but if 
one were studying human sharks, one might reach just the opposite 
conclusion. 

The unemployed. If we begin with the involuntarily idle, 
that is, the unemployed, we shall find that many of them are the 
victims of circumstances which they lacked the strength to combat 



64 ELEMENTARY ECONOMICS 

successfully. Frequently the hostile circumstances have been such 
as no one could stand against. In other cases it was their own 
weakness or their own injurious habits which made these people 
unemployable. There is no doubt that better moral and religious 
teaching would have given them a moral brace and helped them 
to succeed. At any rate, the fact that they are now idle means 
that they are going to waste and are a drain upon, rather than 
a contribution to, the national prosperity, power, and greatness. 
Anything which can be done for future generations to reduce the 
number of such unemployable people will be a definite contribu- 
tion to the strength of the nation. More moral vigor, sounder 
habits, and better training are apparently needed for our econon^ic 
prosperity as well as for purely moral or religious reasons. 

The leisure class. When we come to deal with the voluntarily 
idle — that is, with the leisure class — we are on more certain 
ground. It is in no sense their misfortune, it is their fault, that 
they are idle. It is not opportunity which they need ; it is moral 
regeneration. 

We must be careful, however, not to confuse the person who 
does not have to earn his living with the person who is idle. Many 
persons of independent means are doing work of the very highest 
utility to the nation and to the world. Scientific investigation, ex- 
perimentation, invention, historical and literary study, agricultural 
and mechanical demonstration, political reform, and philanthropy 
have all been promoted by men and women who could afford to 
give their time to such things. 

The leisure class, properly so called, includes only those who do 
little or nothing that is useful or productive, but give themselves 
over to mere self -enjoyment or self-cultivation. Whoever belongs 
to the leisure class as thus defined is a drain upon the wealth and 
prosperity of the nation. The nation is better off every time such 
a person leaves it, and is worse off every time such a person 
arrives. Since he does nothing useful, nothing is lost when he de- 
parts. His food and clothing at least are saved. His wealth, of 
course, remains behind even after he is gone from the world. The 
more such people there are in the nation in proportion to the 



MOR.\LS AND RELIGION 65 

workers, the worse it is for the nation in the long run. The whole 
nation has to be supported by the labor of those who work. If 
all the people work, the task is lightened or else the people live 
better. If only a part of them work, the burden upon the workers 
is either heavier or else there is less produced and consequently 
less wealth. 

Do idle consumers make a market for producers? It is 
sometimes argued, however, that a large number of consumers who 
are not themselves producers is necessary to make a market for 
the producers. An appearance of reasonableness is given to this 
argument by taking the case of a single product, say shoes, though 
any other product would do equally well. It is undoubtedly a 
good thing for the shoemakers to have a large number of consum- 
ers of shoes who are not themselves makers of shoes, provided the 
consumers have something to give in exchange for shoes. The 
more the consumers have which can be given in exchange for 
shoes, the more profitable it is likely to be for the shoemakers. 
If, however, many users of shoes are living wholly on accumulated 
wealth, they will have less to give in exchange for shoes than they 
would have if, in addition to their accumulated wealth, they were 
also producing or earning something. The more workers there are 
in other productive fields besides shoemaking, the more other 
things there will be to be given in exchange for shoes. 

The foregoing argument can be repeated with respect to each 
and every industry or occupation. This merely brings us back to 
the general statement that the more workers and the fewer idlers 
there are in any nation, the more abundant will goods of all kinds 
become and the more rapidly will the nation advance in prosperity 
and power. Overproduction of everything is an impossibility. 

Some are willing to grant, however, that it would be better 
economically if everyone would work than it would be if some 
wasted their time in idleness. After admitting this, it will be 
asked, nevertheless, Has not a man a right to remain idle if he 
has accumulated enough to support himself without further work ? 
Assuming that he has earned his accumulation and has not secured 
it by inheriting it, by marrying it, or by a fortunate speculation 



66 ELEMENTARY ECONOMICS 

in land, there is something to be said for this contention. But he 
who does less well than he can, does ill. One who is still capable 
of doing useful work, and chooses not to do it, is certainly doing 
less well for his country than he might, even though he did well 
when he accumulated wealth. 

Should men be allowed to accumulate wealth ? But why rely 
upon morals and religion to prevent this form of waste or ill- 
doing ? Why not prevent men from living in idleness by forbid- 
ding them to accumulate wealth, or by taking it away from them 
by law if they do so? If men are not allowed to accumulate 
wealth, they will then be encouraged to consume their incomes as 
they go along. Wasteful or luxurious consumption is quite as 
wasteful as idleness. 

Here, then, is the dilemma. If men whose incomes are larger 
than necessary to support them and their families are not allowed 
to accumulate, they will consume more than is necessary or work 
less strenuously in the present. If, on the other hand, they are 
allowed to accumulate a part of their incomes, some of them will 
be able to accumulate so much that either they or their children 
may live without work at some time in the future. It is deemed 
better and more economical to encourage them to work hard and 
live economically in the present by allowing them to accumulate 
and then to appeal to them on moral and religious grounds not 
to waste their lives in idleness or useless self-amusement in the 
future. 

Let us assume, by way of illustration, that two men, A and B, 
have equal incomes, and that their incomes are more than suf- 
ficient to maintain them and their families in efficient comfort. 
A consumes his entire income and never accumulates anything, 
while B consumes only a part of his income, investing the re- 
mainder in productive enterprises of various kinds. The over- 
consumption of A and his family is wasteful and accomplishes 
nothing for the community. What they consume over and above 
that which is necessary for efficient comfort is wasted so far as 
the rest of the country is concerned and might just as well have 
been burned or thrown into the sea, if that would have given 



MORALS AND RELIGION 67 

them any amusement or satisfaction. B's surplus, however, has 
gone into the expansion of industries and the increase of the 
productive power of the country. Up to this point B has done 
much better than A. Now let us assume that after a period of 
years B decides that he has worked long enough and that he will 
spend the rest of his life in sheer idleness or self-amusement. A, 
having accumulated nothing, cannot retire, but is compelled to 
go on working as long as he is able. From this point on, A is 
doing better than B. During their whole lives it is difficult to 
say which does the better, but the odds are slightly in favor of B. 
If, however, B can be persuaded not to remain idle, but to con- 
tinue doing something useful, the advantage is decidedly with B.^ 

The ineffectively employed. Next in order after the idle, 
including both the unemployed and the leisure classes, we have to 
consider the ineffectively employed. By the ineffectively employed 
are meant all those who, through lack of training, lack of oppor- 
tunity, or sheer lack of initiative, are now doing less useful work 
than they might have been doing had they had the proper training, 
opportunity, and initiative. These include men who are doing 
unskilled work who might have been doing skilled work, men 
doing ■ skilled manual work who might have been doing expert 
mental work, or men doing routine mental work who might have 
been doing work requiring inventiveness, originality, and enter- 
prise. The individual who remains less useful to the nation than 
he might be is not only doing himself an injury but is also injuring 
the nation. 

The harmfully employed. One very good definition of a vice 
is that it is a habit which wastes or dissipates human energy. It 
should, perhaps, be distinguished from crime in that vice wastes 
one's own energy, whereas crime wastes not only one's own but 
that of other people besides. The use of drugs which merely 
excite or irritate the nerves, overindulgence in any kind of excite- 
ment beyond what is necessary for recreation, or even excessive 
devotion to sport may become a vice in this sense as truly as 
excessive eating or drinking. 

1 For a fuller discussion see the chapter on Luxury, 



68 ELEMENTARY ECONOMICS 

Luxury. Luxurious consumption can be controlled by author- 
ity and compulsion to a certain extent, but not wholly ; that is to 
say, there are certain clear and undebatable forms of luxurious 
consumption, such as the use of alcohol and opium, which the 
government can safely prohibit, but much must be left to the 
discretion of the individual. There is a timeworn argument to 
the effect that luxurious expenditure gives employment to labor 
and thus benefits the poor. This is similar in principle to the 
theory that the destruction of property, say the burning of a 
building or the breaking of a window, gives employment to labor. 
The stupidity of this argument was never more clearly shown than 
by Frederic Bastiat in his famous work entitled "Sophisms of 
Political Economy." He pictures a shopkeeper who is about to 
chastise a scapegrace son who has broken a pane of glass. Some 
sympathetic bystanders argue that the boy is really a public 
benefactor in that he has made work for the glazier, who will then 
have six francs, the cost of a new pane, to spend, and that the 
butcher, the baker, and others will share in the benefit. 

Assuming that it becomes necessary to spend six francs in repairing 
the damage, if you mean to say that the accident brings in six francs 
to the glazier, and to that extent encourages his trade, I grant it 
fairly and frankly, and admit that you reason justly. 

The glazier arrives, does his work, pockets his money, rubs his 
hands, and blesses the scapegrace son. That is what we see. 

But if, by way of deduction, you come to conclude, as is too often 
done, that it is a good thing to break windows, that it makes money 
circulate, and that encouragement to trade in general is the result, I 
am obliged to cry, halt ! Your theory stops at what we see, and 
takes no account of what we don't see. 

We don't see that since our burgess has been obliged to spend his 
six francs on one thing, he can no longer spend them on another. 

We don't see that if he had not this pane to replace, he would have 
replaced, for example, his shoes, which are down at the heels ; or 
have placed a new book on, his shelf. In short, he would have em- 
ployed his six francs in a way in which he cannot employ them now. 
Let us see then how the account stands with trade in general. The 
pane being broken, the glazier's trade is benefited to the extent of 
six francs, That is what we see. 



MORALS AND RELIGION 69 

If the panes had not been broken, the shoemaker's or some other 
trade would have been encouraged to the extent of six francs. That is 
what we don't see. And if we take into account what we don't see, 
which is a negative fact, as well as what we do see, which is a 
positive fact, we shall discover that trade in general, or the aggregate 
of national industry, has no interest, one way or the other, whether 
windows are broken or not. 

Let us see, again, how the account stands with Jacques Bonhomme. 
On the last hypothesis, that of the pane being broken, he spends 
six francs, and gets neither more nor less than he had before, namely, 
the use and enjoyment of a pane of glass. On the other hypothesis, 
namely, that the accident had not happened, he would have expended 
six francs on shoes, and would have had the enjoyment both of the 
shoes and the pane of glass. 

Now as the good burgess, Jacques Bonhomme, constitutes a fraction 
of society at large, we are forced to conclude that society, taken in 
the aggregate, and after all accounts of labor and enjoyment have 
been squared, has lost the value of the pane which has been broken. 

In one respect the argument against luxury is less strong than 
that against the breaking of a pane of glass, but in another respect 
it is stronger. When the shopkeeper in the story has to spend six 
francs on a pane of glass, he gets no satisfaction out of it and 
deprives himself of a pair of shoes which he needs. Had he spent 
the six francs on a luxury, he would presumably have got some 
enjoyment out of it, even though it had been followed by indiges- 
tion or a headache. To this extent it would have been better to 
have a luxury costing six francs than to have been compelled, 
through the carelessness of an overexuberant son, to spend that 
amount on a pane of glass. On the other hand, when one com- 
pares the expenditure of money for a luxury with the investment 
of money in tools or other instruments of production, one does 
not get so favorable a picture. 

If you have a dollar to spend over and above what is necessary 
to maintain you in efficient comfort, you have your choice of 
spending it on som.e unnecessary article of consumption or of 
investing it in some productive enterprise. Whether it be a dollar 
or a hundred thousand dollars, the principle is the same. If you 
decide to invest your money in a productive enterprise, you tend, 



70 ELEMENTARY ECONOMICS 

to the extent of your investment, to set labor to work erecting the 
buildings or manufacturing the machines which will be needed in 
production. The more people there are who are investing in this 
way, and the more they invest, the more productive enterprises we 
shall have. This not only sets labor to work preparing the build- 
ings and machinery but will continue to employ labor to run the 
enterprises. Again, as a result of this, more goods are produced 
and the nation is better fed, clothed, and supplied with all neces- 
saries. It is, therefore, very much better that there should be a 
great many people investing their money productively than that 
they should merely spend their money for extravagant luxuries 
which are of no use to anyone except themselves. He therefore 
does badly who spends his money luxuriously when he might 
invest it productively. 

Emulation in extravagance. Nothing could contribute more 
to the general prosperity and well-being of the nation than such 
moral habits as would discourage extravagant consumption and 
encourage thrift and wise investments in all sorts of productive 
enterprises. A particularly vicious and wasteful factor in many 
a social group is competition or emulation in extravagance. We 
have all doubtless heard of cases like that of the neighborhood 
that was bankrupted because one family got a new oriental rug 
and every other family immediately tried to outshine that one by 
purchasing something still more expensive, until, before long, each 
family was going into debt to keep up with its neighbors. Of all 
forms of competition, competitive consumption is the most per- 
nicious and wasteful. 

Emulation in the waste of physical energy. It is not only 
the possession of plenty of money which is thus vulgarly adver- 
tised. The possession of abounding physical energy is also adver- 
tised by the practice of conspicuous vices which tend to dissipate 
energy. The young man who can dissipate freely can thus adver- 
tise that he is rich in health and energy, just as a newly rich 
man, by spending money extravagantly, can advertise to the world 
that he has money to spare. When there is no sense of moral 
values and no sober self-restraint, the possession of abundant 



MORALS AND RELIGION 71 

health and the possession of abundant wealth lead to equally 
demoralizing vices. The poor are safeguarded by their poverty 
from the extravagant use of money, but they are quite as likely 
to indulge in the extravagant uses of vitality as are the rich. 
If there be any difference, the dissipation of physical energy is 
worse than the dissipation of money. 

EXERCISES 

1. What are the principal classes of people who go to waste? 

2. Can morality be taught? Give your reasons. 

3. Is a leisure class desirable? 

4. Do idle consumers make a market for producers ? 

5. Would it cure idleness if men were forbidden to accumulate 
large wealth? Would it encourage extravagance? 

6. In what sense is vice a form of waste ? 

7. Is luxury a vice? Does it help business? 

8. Which is worse, to use money wastefully or to use one's strength 
and vitality wastefully? 



PART TWO. ECONOMIZING LABOR 



CHAPTER IX 
THE DIVISION OF LABOR 

As stated in Chapter I the primary factors in the production of 
wealth are the people and the geographical situation. What the 
people supply is labor, and it is very important that this labor be 
economized ; that is, that it be so utilized as to make each and 
every unit of it produce as much as possible. It is economized 
chiefly, first, by its specialization; second, by its use of power 
other than that engendered in its own muscles ; third, by the use of 
tools, machines, and equipment of all kinds ; fourth, by the organi- 
zation of business ; and, fifth, by the balancing of all the factors 
of production. The subject of the present chapter is the division 
of labor, which is an older name for the specialization of labor. 

Meaning of the division of labor. Adam Smith begins his 
great "Inquiry into the Nature and Causes of the Wealth of 
Nations" with a discussion of the division of labor. His state- 
ment of the case has scarcely been improved upon up to the present 
day, though many of his illustrations are out of date. By a 
division of labor he means, first, a system under which no onT" 
produces everything he needs, but each one confines himself to the 
production of that one thing or those few things for the produc- 
tion of which he is best fitted, exchanging his surplus product for 
the surplus products of others who are specializing on other 
things ; second, the process of dividing the work involved in 
the making of a given article (each man performing some single 
operation) and then assembling all the parts, producing a complete 
whole. 

Advantages. Adam Smith names three distinct advantages 
which result from the division of labor: 

First, the improvement in the dexterity of the workman necessarily 
increases the quaHty of the work he can perform ; and the division 

75 



76 ELEMENTARY ECONOMICS 

of labor, by reducing every man's business to some one simple oper- 
ation, and by making this operation the sole employment of his life, 
necessarily increases very much the dexterity of the workman. . , . 
Secondly, the advantage which is gained by saving the time commonly 
lost in passing from one sort of work to another, is much greater 
than we should at first view be apt to imagine it. It is impossible 
to pass very quickly from one kind of work to another that is carried 
on in a different place and with quite different tools. . .-. Thirdly 
and lastly, everybody must be sensible how much labor is facilitated 
and abridged by the application of proper machinery. It is unnec- 
essary to give any example. I shall only observe, therefore, that 
the invention of all those machines by which labor is so much 
facilitated and abridged, seems to have been originally owing to the 
division of labor. Men are much more likely to discover easier and 
readier methods of attaining any object, when the whole attention 
of their minds is directed toward that single object, than when it is 
dissipated among a great variety of things. But, in consequence of 
the division of labor, the whole of every man's attention comes natu- 
rally to be directed towards some one very simple object. It is 
naturally to be expected, therefore, that some one or other of those 
who are employed in each particular branch of labor should soon find 
out easier and readier methods of performing their own particular 
work, wherever the nature of it admits of such improvement. A great 
part of the machines made use of in those manufactures in which 
labor is most subdivided, were originally the invention of common 
workmen.^ 

Adam Smith's opinion that the third and last of these advan- 
tages was of special importance has been fully justified by subse- 
quent experience. Machines have now taken the place of the 
simple tools of that day. Sometimes these machines are directed 
and fed by attendant laborers, but sometimes they are so perfected 
as to require very little attention, feeding themselves automatically 
and stopping automatically when anything goes wrong. In these 
cases the work of the attendant is reduced to a minimum, con- 
sisting rjierely in starting the machines and putting them in order 
when anything goes wrong. 

There are penalties, however, to be paid for the extreme division 
of labor to which we have become accustomed. It is undoubtedly 

1 Wealth of Nations, chap. i. 



THE DIVISION OF LABOR 77 

efficient and economical ; without it many articles which, are now 
enjoyed by great masses of people would be so scarce as to be 
available only for the very few ; but it puts a great strain upon 
the people who specialize. The ability to give close attention to 
one thing for a long time is not very widely distributed. Only 
the superior races possess it ; and even within these races there 
are many people who lack it, especially in their early youth. They 
easily become discontented and restless if required to work under 
conditions of extreme specialization. They would be much better 
satisfied with more desultory work, even though such work ac- 
complished less. This is one of the reasons why the quality of 
the people is such an important factor in national prosperity. 
A people who cannot stand specialized work will easily be left 
behind by a people who can. 

Two kinds of division of labor. As suggested above, the divi- 
sion of labor takes on a somewhat different character when highly 
developed machinery comes into general use. This may be ex- 
plained further by pointing out two kinds of division. One has 
been called contemporaneous division of labor and the other suc- 
cessive division of labor. Under the contemporaneous division of 
labor men are, at the sam& time, specializing in different lines of 
production. One group is producing, let us say, breadstuffs and 
bread, another meat, another textile fabrics and clothes, and so on, 
each group bringing some kind of raw material through the various 
stages of production until it matures into a finished product 
ready for consumption.^ 

Another phase of the contemporaneous division is found when 
different men are, at the same time, producing different parts of 
the same product, the parts being later assembled into a finished 
whole. Lumbermen are cutting the timber which eventually goes 
into a house, while men in the ore beds are getting out the iron ore 
which eventually goes into the house in the form of nails, and 
still other workmen are making the brick or quarrying the stone 
which will eventually go into the foundations and the chimneys. 

1 See Taussig, Wages and Capital, p. 6. New York, 1898. 



78 ELEMENTARY ECONOMICS 

Under the successive division of labor different sets of men are 
working on the same material, bringing it forward through the 
successive stages to maturity. Thus, following the choppers who 
fell the trees come the sawyers who saw them into rough boards, 
the carriers who transport the boards, the men in the planing 
mill who plane them, and so on, until the carpenters fit them into 
their places in the house. The iron ore goes through similar stages, 
as does every bit of material which enters into the final product. 

The lengthening of the process. This lengthening out of the 
process of production, making it extend over a longer period of 
time, is one of the most striking characteristics of the era of 
machine production. It calls for more foresight, more planning 
for the distant future, more expenditure of labor and investing 
of capital long in advance of the consumption of goods, than was 
ever necessary or possible in any previous age. There is, therefore, 
under this regime, a greater demand than ever before for foresight, 
for thrift, for courageous investment, for the hazarding of large 
sums on the chance of gains in the distant future. There may 
be some connection between this fact and the fact that the 
large rewards, in our day, go to the men who exercise foresight, 
who invest courageously and wisely, who hazard their time and 
wealth on enterprises which look to the future. 

Work done in different places. The contemporaneous division 
of labor has to do with space ; that is, it involves the doing of 
different kinds of work in different places at the same time. This 
calls for the coordination of that labor and the exchange of prod- 
ucts in order that each specialist or specialized group may get 
the advantage not only of its own efficiency but of that of other 
specialists and specialized groups. Where different workers are at 
the same time, but in different places, working on different parts 
of the same product, it is necessary that someone should coordinate 
their work. In a great automobile factory, for example, there are 
many different parts being produced simultaneously. In order 
that these parts may all be assembled and fitted together there 
must be very careful planning and organization. This is what is 
meant by the coordination of labor performed in different places. 



THE DIVISION OF LABOR 79 

The time element. The successive division of labor has to 
do with time; that is, it involves doing, at different times, by 
different men, different parts of the work of completing an article. 
In the same automobile factory the same piece of material is 
worked upon by many men in a regular order of succession. This 
calls for the coordination of labor performed at different times. 

The lengthening out of the process of production in the whole 
of modern society makes this form of coordination peculiarly im- 
portant. Its greatest importance, however, is found outside any 
individual factory. Before the automobile factory could be built, 
there must have been much work done in procuring the raw 
materials for the building and the machines, in producing food 
and clothing for laborers, and in doing a multitude of other things. 
Similarly, before shoes can be made, cattle must be raised, slaugh- 
tered, and their hides tanned ; shoe factories must be erected and 
equipped with products from the mines and forests, and a vast 
amount of preparation must be made in other ways. The labor of 
the herdsman must be coordinated with that of the clerk in the 
shoe store, otherwise we should not have shoes as we now have 
them. Unless this coordination is brought about, the same man 
would have to kill the animal, skin it, tan the hide, and go through 
all the processes necessary to the finishing of a pair of shoes. 

Territorial division of labor. In one of its broader aspects the 
contemporaneous division of labor is known as the territorial 
division of labor. This is what takes place when one region pro- 
duces that for which it is best fitted, and exchanges its surplus for 
the surplus of other regions which are also specializing on those 
products for which they are best fitted. Thus, our Middle Western 
states of the upper Mississippi Valley produce hay, grain, and 
live stock, not only to supply bread, meat, and dairy products for 
themselves but for the rest of the country as well, besides sending 
a great deal abroad. The South grows cotton enough to supply 
the greater part of the world. Both regions receive in exchange 
for these farm products the manufactured products of the Eastern 
states and foreign countries and the mineral products of the 
mountain states and the upper regions of the Great Lakes. 



8o ELEMENTARY ECONOMICS 

Territorial division of labor and transportation. It is the 

territorial division of labor which gives rise to the important busi- 
ness of transporting goods from one region to another. Obviously, 
if one region should find it advantageous to produce everything 
needed or desired by its inhabitants, there would be no occasion 
for transporting goods into it. Similarly, if it did not produce a 
surplus of something or other which could be sold on an outside 
market, there would be no occasion for transporting goods out- 
ward. At the same time, the territorial division of labor is made 
possible by the transportation of goods and tends to grow in im- 
portance in proportion as transportation becomes cheaper and more 
efficient. A slight advantage in the exchange of products might 
easily be overcome by a heavy transportation cost. For example, 
even though New England cannot grow wheat so economically as 
Kansas or North Dakota, yet if the cost of transporting wheat 
over the intervening distance, and of transporting manufactured 
products back to pay for the wheat, were very high, New England 
might find it advantageous to grow her own wheat, and the states 
which now produce wheat might find it advantageous to do their 
own manufacturing. 

The advantages of a territorial division of labor, where the 
transportation problem is easy, are similar to those which result 
from a division of labor among individuals in the same neighbor- 
hood. If it is profitable for each individual to specialize upon the 
work for which he is best fitted, it is equally profitable for each 
neighborhood to specialize. 

In almost any neighborhood, however, there is some diversity 
of soil and natural resources as well as a diversity of talents 
among the people. Therefore it will seldom happen that a whole 
neighborhood, much less a whole region of considerable size, can 
profitably specialize upon a single product. It is more likely to 
happen that a whole neighborhood or region will find it advan- 
tageous to specialize upon a number of products. Thus, New 
England, the South, and the Corn Belt all produce a considerable 
variety of products, but each also finds it advantageous to import 
a considerable variety of other products. New England, for ex- 
ample, probably secures her bread and meat at less cost to herself 



THE DIVISION OF LABOR 8i 

by devoting most of her energy to manufacturing and then ex- 
changing her manufactured products for the wheat and beef of 
the West than she would if she tried to grow enough of these 
important food products on her own soil to feed all her people. 

International division of labor. When the territories con- 
sidered are not different sections of the same country but different 
countries, we have what is known as the international division of 
labor. Were it not for certain uneconomic factors which enter 
into the problems of national life and existence, everything which 
can be said in favor of a territorial division of labor and freedom 
of exchange within a country could also be said, and with equal 
force, in favor of an international division of labor. The chief of 
these uneconomic factors is the possibility of war. W^ar is the 
greatest disturber of normal economic activities, and until it can 
be eliminated every nation must calculate upon its possibility and 
be prepared for it. In case of war a nation which is not prepared 
to produce all the necessaries of life, as well as all military supplies, 
may find itself helpless before a foreign enemy. Its only other 
hope would be to keep open the channels of commerce which con- 
nect it with outside sources of supply, but this is one of the things 
which the enemy country would try to prevent. Nitrates, for 
example, are, in the present state of science, necessary both for 
fertilizers and for explosives. A country which could neither pro- 
duce its own nitrates nor manage to get a supply from abroad 
could not wage war for a very long time. 

Adam Smith's remarks, quoted earlier in this chapter, regarding 
the way in which the minute division of labor has aided in the 
invention and improvement of machinery may be applied to the 
much greater problem of the development and improvement of a 
great and complex industrial system. When each workman spends 
all his time performing a single operation, it is much easier for him 
to devise a better way of doing it than it would be if he had to 
give his attention to many things. It is probable that no im- 
portant and complicated machine was ever invented and made to 
work successfully without a great deal of trying out, modification, 
and general improvement. In actual use many weaknesses in the 
machine are revealed which no inventor, however wise, could have 



82 ELEMENTARY ECONOMICS 

foreseen and prevented. Even such a simple device as a bicycle 
passed through a long and interesting evolution before it reached 
a stage which made it generally useful and popular. The aero- 
plane is another illustration of gradual and detailed improvement 
after it was actually in use. 

If it is impossible for any human intelligence to invent and 
construct at once a satisfactory machine, it would be obviously 
impossible to have invented and organized a whole industrial sys- 
tem. That would present an infinitely more difficult problem than 
the invention and construction of any machine that was ever built. 
It has been by age-long trial and error, variation and selection, 
experiment and failure, that even a tolerably successful industrial 
system has been worked out. There are doubtless endless improve- 
ments yet to be made, but they will certainly be made by the 
same process of gradual and piecemeal adjustment. Anyone who 
thinks that he can devise and organize a better system than the 
present shows, by the very fact that he thinks so, that he is un- 
fitted for the task. He shows that he lacks the first element in 
fitness ; namely, a knowledge of the vastness of the problem and 
the infinite number of difficulties to be overcome. It is different, 
however, with one who thinks of some detail in the present 
industrial system which might be improved. This presents a 
problem worthy of the greatest minds. 

EXERCISES 

1. What are the principal methods of economizing labor? 

2. What is meant by the division of labor? 

3. What are its chief advantages ? 

4. What are the two kinds of division of labor ? 

5. What is meant by the contemporaneous division of labor? 

6. What is meant by the successive division of labor? What 
is its relation to thrift and foresight ? 

7. What is the relation of transportation to the territorial division 
of labor? What are its advantages? 

8. What is meant by the international division of labor? What 
are some of its advantages and disadvantages? 



CHAPTER X 

POWER 

One of the most effective ways of economizing labor is the use 
of other sources of power than man's own body. Physically he 
is not particularly strong, and if he had to rely upon his own 
bodily strength alone he could not accomplish very much. 

Power needed for moving material objects. It has been 
pointed out many times that man's work, on the physical side at 
least, consists in moving material objects. For this work the first 
essential is power. The power first applied was, of course, that 
which was generated in his own body and exercised through his 
own muscles. But the secret of the industrial success of modern 
civilized nations lies in their command of other sources of power 
rather than in any superior muscularity of their own. 

Importance of animal power. The first of these sources of 
power which man utilized on a large scale was that of animals 
which he domesticated and enslaved. They are still one of the 
most important sources, if not the most important source, of 
power. According to the Yearbook of the United States Depart- 
ment of Agriculture, there were on the farms of the United States 
on January i, 1919, about 26,459,000 horses and mules, to say 
nothing of those in use in the cities and towns. The latest figures 
for horses and mules not on farms are those given in the census 
of 1910. On April 15 of that year there were 3,453,000. Assum- 
ing that there were as many in 1919, it would bring the total up 
to 29,912,000. Some of those on farms, of course, are colts too 
young to work. Those of working age, both on farms and not on 
farms, are probably close to 26,000,000. Besides horses and mules, 
a few oxen are still used. The "primary horse power" — that is, 
horse power in its original sense — used in manufacturing in the 
United States in 1914 was estimated at 22,547,574. It has been 

S3 



84 



ELEMENTARY ECONOMICS 



increasing rapidly, so that by 19 19 it was certainly much larger. 
It is not easy to compare the actual working power of a horse with 
that of the horse-power unit as used in measuring the power of a 
steam engine, but, assuming that they are equal, it would appear 







WHERE POWER IS SUPPLIED BY HUMAN MUSCLES. RICE 
FARMING IN JAPAN 

that the total animal power in use in the United States was, 
until recently, very nearly as great as the total steam and water 
power used in manufacturing. 

Historical importance of the ox. The ox, from the most 
ancient times until quite recently, has been the chief if not the 
sole draft animal of all the races that have used draft animals at 



POWER 85 

all. His docility and patience, his great strength, the cheapness of 
his harness, and his ability to find his own living when not at 
work contributed to make him a most valuable assistant to man 
in his struggle for the conquest of the earth. In the pulling of the 
heavy wooden plows and harrows that were in use before the 
modern steel tools were invented, and of the lumbering carts that 
were in use before modern vehicles were constructed, he enabled 
men to cultivate the soil on a vastly more extensive scale than 
would have been possible by human muscles alone. He thus con- 
tributed to the production of food for increasing populations of 
men, and in the end he contributed his own body to help feed them 
and his own hide in order that they might be shod. In many parts 
of the world he is still the principal draft animal for farm work. 
If we take the whole history of man's use of power, it is probable 
that the ox has furnished more in the aggregate than any other 
agency, not excluding coal and steam. 

Solar energy. The great physical source of power, so far as 
man has been able to develop it, is understood to be the sun. The 
amount of solar energy which comes to the earth in the form of 
light and heat is so stupendous as to bewilder the imagination. Its 
most important service is in the promotion of plant growth and, 
through plants, of animal growth ; but it is also transformed into 
mechanical power in a number of ways. 

In the first place, it vaporizes water, which then rises. When this 
water vapor reaches high altitudes and is congealed it falls in the 
form of rain, snow, etc. Some small fraction of it falls on moun- 
tains and other high portions of the earth's surface, whence it flows 
downward through the streams. These are harnessed and made to 
turn water wheels, thus furnishing mechanical power to do man's 
work ; that is, to move pieces of matter. 

In the second place, through plant growth combustible material 
is stored up in the bodies of trees and other plants, thus producing 
fuel. The accumulation and covering over of vast masses of 
combustible vegetable material in previous geological periods gave 
us our coal beds, which have recently become a principal source 
of both artificial heat and mechanical power. It is generally 



36 ELEMENTARY ECONOMICS 

supposed that petroleum is of animal origin. If so, it is, like 
coal, the product of solar energy. 

J^In the third place, the direct rays of the sun may be so con- 
centrated as to produce an intense heat, which may, in turn, be 
used to transform water into steam. According to tradition the 
great mathematician Archimedes burned the Roman ships which 
were besieging his native city of Syracuse by the use of a large 
number of mirrors. By reflecting the sun's rays from all these 
mirrors upon a single spot so much heat was concentrated as to 
set the ships on fire, one after another. Solar engines have lately 
been constructed which make use of converging mirrors for the 
concentration of the sun's rays. This produces an intense heat, 
which, in turn, converts water into steam. 

Winds. In the next place, if we may assume that winds are 
in general caused by variations in temperature, they may be said 
to be derived from solar energy. This mechanical power, as used 
for the moving of boats, has been of the very greatest importance 
in the development of commerce and the spread of civilization. 
The epoch-making voyages of Columbus, as well as the voyages 
of great numbers of men less noteworthy than he, were made 
possible by the ingenuity with which man had learned to utilize 
this vast source of power. For certain kinds of stationary work 
which does not have to be performed regularly, such as pumping 
water, grinding grain, etc., the windmill has proved an economical 
device for utilizing the power of the winds. . 

Tides. Another source of power of which some use has been 
made is the tide. This can be traced to the momentum of the 
earth rather than to solar energy. The rising and the falling of 
the tides, especially along coasts with many inlets and estuaries, 
have created opportunities for tide mills which can be made to 
do certain kinds of work. 

Sources of power in the distant future. With all these sources 
of power, and possibly others which may be developed, there is 
no likelihood that our ingenious race will ever be compelled to 
fall back upon its own muscles, or even to depend exclusively upon 
animal power. In that distant day when our coal beds and oil 





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88 ELEMENTARY ECONOMICS 

fields are exhausted, the sun's rays will still continue to strike the 
earth. That being the case, trees and other plants will still grow, 
though wood could scarcely take the place of coal and petroleum. 
Alcohol can scarcely become as cheap as gasoline has been in the 
past, but it can be manufactured in considerable quantities from 
a variety of plants. x\gain, the rains and the snows will continue 
to feed our rivers and turn our water wheels. Electrical transmis- 
sion will enable us to utilize many streams now running idly to 
the sea and to distribute the power over wide areas and send it 
long distances from the streams. Solar engines may be so perfected 
as to enable us to utilize the inconceivable and inexhaustible flow 
of energy which, comes to us in the form of direct rays from the 
sun. The winds will continue to blow and push our sails and 
turn our windmills. And so long as the earth continues to revolve 
about its axis the tides will continue to ebb and flow, and these 
may furnish us considerable quantities of power. 

Even if it should happen that none of these sources, nor all 
of them combined, should furnish quite such cheap power as that 
which we now enjoy through the use of coal, still we may become 
so well to do, through improved agriculture, improved technical 
processes for utilizing power, and more rational habits of living, as 
to enable us to bear the extra cost of these other kinds of power 
with no great inconvenience. Even if this should not happen, it 
must not be forgotten that a considerable number of civilizations 
have been built up and multitudes of people have lived comfort- 
ably and happily with no power except that of their own muscles, 
their domestic animals, the winds, and the waterfalls. 

The steam engine. Next to the yoking of the ox at some time 
in -the prehistoric past the most momentous event in the history 
of man's use of power was the invention of the steam engine. 
The reason why this was so momentous was that the coal beds of 
the north temperate zone furnish a vast quantity of very cheap and 
very concentrated fuel. By merely vaporizing water in a boiler by 
means of this cheap fuel great pressure can be exerted. This pres- 
sure can be made to move a piston. From this point on, further 
developments are merely the results of mechanical adjustments. 



90 



ELEMENTARY ECONOMICS 



Whenever one object, such as a piston, can be made to move 
as we want it to move, other objects can be hitched to it and 
be made to move also. The first of these mechanical adjust- 
ments to produce great results was when the moving piston was 
made to turn a wheel, thus converting linear motion into circular 
motion. After that adjustment was made every form of steam- 
driven machinery became a mechanical possibility. 





Human 


'Horses 
Mules 


•Muscular • 




Asses 
Oxen 
Buffaloes 


^ 


Animal - 


Yaks 




Elephants 
Camels 


^ 


Llamas 




Dogs 
^ Reindeer 




'Wind 




r Streams 




Waters Waves 


_ Mechanical 


[Tides 




^ , f Steam engines 

FUeli nr , , . 

L Internal-combustion engmes 




. Solar engines 



EXERCISES 

1. In what does labor really consist? 

2. Does this explain why power is needed? 

3. What are the leading forms of power used as an aid to man? 

4. What of the relative importance of animal and mechanical power ? 

5. What are the most important forms of animal power? 

6. What are the most important sources of mechanical power ? 

7. What about the future : are our sources of power likely to be 
exhausted ? 

8. What have been some of the most important events in the 
history of man's use of power? 



CHAPTER XI 
CAPITAL 

Instruments of production. Tools and machinery deserve a 
position next in importance to power as economizers of human 
labor. In fact, power and machinery are almost inseparable. An 
ingenious and enterprising people will not only develop many 
sources of power but will manage to invent and make more and 
more instruments and contrivances to aid in production or to 
enable a given amount of labor to produce more than it could 
possibly produce with fewer instruments. This great mass of 
engines, instruments, and contrivances not only aid greatly in 
production but they come also to form a very important part of 
the wealth of the nation. All wealth of this kind has come to 
be called producers' goods. All these and other producers' goods 
are called capital for short. 

Producers' goods and consumers* goods. This great body of 
instruments of production is undoubtedly wealth in the sense 
that it is a means of increasing well-being. You can truthfully 
say of it, " More such instruments, more well-being for the nation ; 
fewer of them, less well-being." But these instruments constitute 
a special kind of wealth. They do not satisfy our desires directly ; _^_^ 
they help to satisfy them indirectly by enabling us to get other ,a^ 
things that dp satisfy our_ desires directly.^ Those goods that ^ 
satisfy desires directly are called consumers' goods. For example, 
plows, reaping machines, flour mills, and ovens are producers' 
goods ; bread is consumers' goods. 

Raw materials. Sometimes, however, an article which is ulti- 
mately destined for direct consumption, but is still in the state 
called raw material, is regarded as capital. Thus wheat, the inside 
part at least, is destined for the direct satisfaction of human de- 
sires when it is made into bread. But while it is still in the form 

91 



92 ELEMENTARY ECONOMICS 

of wheat its owner does not expect to get any direct satisfaction 
from it, but to get some money for it, and with this money he may 
get some consumers' goods. He will regard his wheat as capital 
rather than as consumers' goods. Again, after it is made into 
flour, so long as the flour is in the hands of the miller, the dealer, 
or the commercial baker, it is not regarded by its owner as a 
means of direct satisfaction but as a means of getting an income. 
All these men will regard it as capital, along with the tools, ma- 
chines, buildings, and other things used in the business. 

What is capital? Ca£ital_may therefore be prettyjtimadiy^ 
defined as any kind of property, aside from land, which ajnjmuses 
in his business for__^fc^ purpose of getting an income.^ Even a piano 
which the owner rents for an income and does not use for his own 
pleasure would be called capital. 

Capital is goods. Let it always be remembered that capital is 
goods, not a quantity of money. Sometimes, however (in fact, 
usually), a man has to have money or purchasing power as a 
means of buying the engines, tools, instruments, machines, etc., 
which make up his capital. It is sometimes said, inaccurately, 
that he has transformed his money into these other things or that 
he has transformed one kind of capital into another. That is not 
true. He exchanged his money for them. There was no trans- 
formation. This inaccurate way of thinking has sometimes led 
to another inaccuracy ; namely, that of thinking of capital as a 
lot of money or some kind of purchasing power. Capital is 
goods. Those goods have value or purchasing power, but the 
purchasing power is not the capital, it is only the value of the 
capital. One might as well say that since every man has weight or 
height therefore man is weight or height. 

How wealth is measured. Another reason which leads er- 
roneously to thinking of capital as a fund of value is found in the 
fact that capital, like all wealth, is measured in terms of value and 
its quantity expressed in terms of money. There is no good way 
of saying how much capital there is in any community or in the 
possession of any individual except by saying it in terms of money. 
If any capitalist were asked how much capital he possessed, and 



CAPITAL 



93 



he were to answer in terms of tons, or cubic feet, or yards, or any 
other unit of physical measurement, he would not convey any clear 
or definite idea. Therefore, if you ask any business man to state 
how much capital he uses in his business, he can only answer you 
intelligently by saying so many dollars or so many dollars' worth. 
This is a mere quantitative expression. If, however, you were to 
ask him in what his capital really consisted, he could only answer 
you intelligently by giving you an inventory of the various goods 
which make up his fund of capital. The only exception to this rule 
would be the money-lender, whose capital consists solely of money. 

Capital the result of working and waiting. The next question 
to arise is, How does capital come into existence? If it consists 
of tools, buildings, machines, equipment, etc., it is rather obvious 
that they come into existence because labor is expended in pro- 
ducing them. But this does not tell the whole story. In order 
that any community may come into possession of a larger stock 
of tools and equipment, it must, temporarily at any rate, divert its 
labor force from the production of consumers' goods into the 
production of these producers' goods. Some labor must be put to 
work making tools, machines, buildings, equipment, etc., and just 
that much less labor will be available during that time for the 
production of consumers' goods. During this period the com- 
munity will have fewer consumers' goods than it otherwise might 
have had. Of course, the expectation is that the tools and equip- 
ment, after they are produced and put to use, will again add to 
the total production. This, however, involves a certain amount of 
postponement of consumption. 

In a society where things are done by free individuals working 
under the system of voluntary agreement, any individual may 
decide that he will consume a little less in the present or the im- 
mediate future in order that he may have a little more to consume 
in the distant future. The way he does this is to save and invest ; 
that is, buy fewer consumers' goods in order that he may buy more 
producers' goods, or else to turn aside, as may have been done in 
very simple states of society, from the work of gathering consum- 
ers' goods in order to apply himself to the work of making tools. 



94 ELEMENTARY ECONOMICS 

Making tools rather than consumers' goods. A primitive 
j&sherman has frequently been used as an illustration of this simple 
process. He has been in the habit of catching fish with very simple 
tackle, but he sees an opportunity of increasing his catch if he 
can only get some kind of boat, so he decides to spend a, part of 
the time each day in making a boat instead of spending all his 
time catching fish. By this combination of frugality and industry 
he eventually comes into possession of a boat which thereafter 
adds to his income and more than compensates him for the fru- 
gality which he practiced during the period in which the boat 
was building. The case is doubtless real enough to serve as 
an illustration of the essential process of increasing the stock 
of capital. 

Combination of work and thrift. It has not been many gen- 
erations since farmers used very crude and simple implements, 
some of which they could make for themselves. The farmer who 
made his own plow was depriving himself of the opportunity for 
amusement, which is a kind of consumption, or was reducing 
somewhat his consumption of material goods during the period 
when the plow was being made. After it was finished it assisted 
him in producing subsistence and added to his income available for 
consumption. This is in all essential particulars similar to the 
case of the primitive fisherman. 

A little later, however, the farmer, instead of making his own 
plow, hired a blacksmith to make it, paying the blacksmith money 
for his work. Here we have the same combination of labor and 
frugality as in the other cases, the difference being that in the 
making of the plow the blacksmith does the laboring and the 
farmer exercises the frugality. With the money which he paid 
for the plow he could have bought consumers' goods and had 
immediate enjoyment. He postponed that enjoyment when he 
paid the money to the blacksmith and received the plow. In the 
then distant future, however, the plow added to his income and 
enabled him to make up for the loss of opportunity for immediate 
consumption and thus compensated him for the postponement 
which he underwent when he purchased the plow. 



CAPITAL 



95 



Investing, or buying producers' goods instead of consumers' 
goods. The modern farmer, however, instead of hiring the black- 
smith to make the plow usually buys his plow ready made. So far 
as he is concerned the act of frugality is the same as though he 
deliberately hired the blacksmith to make it. He surrenders a 
certain amount of ready cash with which he might have bought 
consumers' goods ; he receives the plow, which for a period of 
years will add to his income and therefore compensate him. 

In the making of the plow, however, there were other tools used 
as well as labor. Those other tools had been made in much the 
same way as the plow. Someone had invested money in them 
and then hired other labor to use the tools in the making of the 
plow. It has become, therefore, a very complicated process ; but 
anyone who will analyze the process will find always the same 
two factors involved; namely, waiting and working — postpone- 
ment of consumption on the one hand, labor on the other. 
No capital can ever come into existence without this combination. 
The fact that this combination always exists may be obscured by 
the intricacies of the modern industrial process, and it may require 
a little more intelligence and study to see clearly where and how 
the frugality and the labor are combined than are necessary when 
studying the primitive fisherman or the old-fashioned farmer. 

Separation of the functions of working and waiting. In the 
highly complicated industrial system of the present, with its in- 
increase of specialization, the two functions of waiting and work- 
ing are generally performed by different persons and classes of 
persons. This has given rise to some of the most intricate and 
most difficult of our social problems. The small farmer, for 
example, who owns his own land and his own teams and farming 
outfit, and who does his own work, combines both functions. 
When he bought his team and outfit out of his own savings, he 
had to give up, for the present, the means of buying consumers' 
goods ; that is, he had to wait for his consumer's enjoyment until 
the outfit should begin to earn him something. If, however, he 
hires someone else to do his work, there is a separation of 
functions. 



96 ELEMENTARY ECONOMICS 

In a simpler state, in which the same individual exercised both 
functions, no social or class antagonisms were developed. Even in 
the intermediate stage, when the farmer bought his plow from the 
blacksmith and then used it himself and the blacksmith bought 
his own tools and used them himself, we find both functions per- 
formed by the same individuals. Class antagonisms could hardly 
develop under these conditions. But when, as in the modern in- 
dustrial system, the capitalist, especially if he be a large capitalist, 
lives mainly from the income of his capital and the laborer mainly 
from the income of his labor (in other words, when the two func- 
tions are sharply separated), class feeling and class antagonism 
have developed. It has come about in our urban industries that 
the average person who performs manual labor receives his wages 
in weekly installments and spends them mainly for consumers' 
goods, whereas the very tools with which he works are owned by 
other men who have specialized in the function of investing their 
money ; that is, in buying capital, or tools and equipment. 

Separation of the function of the laborer and the capitalist. 
Capital has existed, of course, as long as tools and equipment have 
existed, but this separation of the two functions, that of the laborer 
and that of the capitalist, has become general only since the rise 
of machine production. Before that time the function of the 
capitalist was not important enough to create an opportunity for 
many men to live exclusively by the performance of this function. 
Not enough capital was needed in the primitive forms of industry 
which preceded the present forms to enable a large number of 
men to live on its earnings. 

It is this fact which is probably meant when it is erroneously 
stated that capital in the modern sense came into existence with 
the rise of machinery. Capital in the modern sense does not differ 
from capital in the former, or capital in the ancient, sense ; it 
differs only in the sense that there is more of it and that much 
more is needed. This combination of facts — the fact that more of 
it is needed than ever before and that there is more of it supplied 
than ever before — has created what we call the capitalist class in 
modern industry, and that is a matter of importance. 



CAPITAL 97 

Coordinating labor which is performed at different times. 
In a somewhat special but very important sense we may say that 
the function of the investor is to aid in production by coordinat- 
ing labor which is performed at different times. In the chapter on 
The Division of Labor it was pointed out that there are two dis- 
tinct forms of the division of labor ; namely, the contemporaneous 
and the successive. Under our modern industrial system the suc- 
cessive division of labor has been greatly lengthened out. In some 
cases many years elapse between the beginning of a process and 
the final completion of the production of a consumable article, as 
when mines are opened, ore smelted, factories built and equipped, 
long before we can begin to enjoy the products of the factories. 
There is a striking analogy between the lengthening out of the 
successive division of labor and the widening out of the contem- 
poraneous division of labor. The latter has been brought about 
through improved means of communication and transportation. It 
is literally true at the present time that thousands of miles or even 
half the earth's circumference may separate men who are working 
for the production of the same article. The coordination of labor 
performed at such widely separated points of space is one of the 
most important and striking aspects of the modern industrial sys- 
tem. It is, however, no more important or striking than the 
similar coordination which has taken place between labor per- 
formed at widely separated points of time. Anyone who cares to 
investigate this needs only to find out how long ago the mills were 
built in which the flour was ground which entered into the bread 
which he ate for dinner, or the factories in which his clothes or 
his shoes were manufactured. Even the hides from which his shoes 
are made grew on animals that were born several years ago. 

There are various ways in which this coordination of labor 
performed at different times may be presented to the mind. In a 
primitive state of industry each unit of labor was performed by 
men working with few and simple tools. The tools may be said to 
represent labor performed in previous times. When the worker 
uses tools, his work in the present time is coordinated with the 
work of the man who made the tools. But since the- tools were 



98 ELEMENTARY ECONOMICS 

very few and simple, it would be correct to say that a given unit 
of present labor was being coordinated with a very small amount 
of past labor. 

Under modern conditions the average laborer is using more 
tools, as well as larger and more complicated machinery, than were 
used by the primitive laborer. These large and complicated 
machines, like the primitive tools, represent labor performed at a 
previous time. The labor of the workmen using them is literally 
being coordinated with the labor of the men who made the ma- 
chines. Since the tools are so numerous, costly, and complicated, 
it is correct to say that a given unit of present labor is being 
coordinated with a large amount of past labor. 

Lengthening the process of production. In order that there 
may be factories, mines must be opened and ore extracted. Ore 
must then be smelted and purified into iron and steel and made 
into machinery. But no one wants machinery for its own sake, 
any more than he wants ore or pig iron. Machines are wanted 
only as they will help to produce things desirable for their own 
sake. It is this constant looking ahead and taking thought for the 
future, accompanied by the postponing of present consumption in 
favor of future consumption, that makes possible the coordination 
of labor performed at different times. 

Combination of factors. Something more than frugality, thrift, 
and foresight are necessary, however. Without mechanical in- 
genuity, however frugal, thrifty, and farsighted a person might 
be, he would find it difficult to exercise these qualities profit- 
ably. Unless someone were able to invent superior methods of 
production which required the exercise of those qualities, they 
would be of comparatively little economic advantage to those who 
possessed them. 

Here we have an example of a class of cases which continually 
perplex the amateur student of economics. There are cases where 
two or more factors are absolutely necessary to get a given result. 
Fundamentally the problem is no more obscure than that in- 
volved in the formula 2x3 = 6. The students will agree that 2 is 
just as essential as 3, and 3 as essential as 2, in getting 6. 



CAPITAL 



99 



In the higher realms of economics we find numerous examples of 
the same problem. Forethought and inventiveness are examples of 
mental qualities which are combined to secure mechanical progress. 
However inventive men may be in contriving mechanical improve- 
ments, unless someone is willing to perform labor long in advance 
of any useful result, or pay someone else for performing that labor, 
all these mechanical contrivances will remain either in the brains 
of the inventors or in museums. 

The productivity of capital. There are some extreme socialists 
who deny that the capitalist performs any necessary function. If 
that were true, it would be hard to frame an argument to show 
that society as a whole should do precisely what the capitalist 
is doing. The socialist would then have to admit that the capi- 
talist, instead of performing a useless function, performs a most 
important one, — so important that society as a whole should take 
it over. To say that society should do its own investing is to say 
that it should become its own capitalist. This would present a 
question to be debated. The question would be. Can the useful 
function of coordinating labor performed at different times be 
done more economically and satisfactorily by the community 
than by private individuals ? ^, 

EXERCISES 

1. What is the difference between producers' goods and consumers' 
goods ? 

2. Are producers' goods growing in volume and importance ? Why ? 

3. What is capital? 

4. Why is capital sometimes spoken of as though it were money? 

5. How does capital come into existence? 

6. Would our stock of tools and machinery increase unless some 
of us were thrifty enough to buy them instead of spending all our 
money for consumers' goods? 

7. In what sense does the buyer of producers' goods help in the 
successive division of labor as described in Chapter IX? 

8. What is meant by lengthening the process of production? 

9. What is meant by the productivity of capital ? 



CHAPTER XII 
THE ORGANIZATION OF BUSINESS 

Large capital necessary. The growth of machine production 
has made necessary such large aggregations of capital as to require 
the combined accumulations of numbers of men. In comparatively 
few cases does a single individual possess enough wealth to equip 
a modern factory, railroad, steamship company, mine,., or even a 
large mercantile house. Were it not possible to combine the wealth 
of a number of individuals, large-scale production would be the 
privilege of only a few very wealthy men. 

Methods of combining capital. There are three distinct 
methods of combining wealth in business : one is known as the 
partnership ; another is the corporation, or joint-stock company ; 
and the third is the cooperative society. The partnership is a 
simple combination of two or more individuals in the ownership 
and management of a given business, in which each partner is fully 
responsible for the acts and liabilities of the group. The partner- 
ship is merely an enlargement of the individual. The individual 
who owns and operates his own business is, of course, fully re- 
sponsible for all debts and obligations, and, subject to bankruptcy 
and homestead laws, all his property may be taken in payment of 
any obligation incurred in the business. Where two or more men 
join together in a partnership each partner is responsible in the 
same sense and to the same extent as he would be if he were the 
sole owner. 

Difficulties of partnership. Obviously a partnership on these 
terms is possible only among men who are very intimately ac- 
quainted with one another and who have complete confidence in 
one another. Since each partner is fully responsible for the acts 
of every other, so far as they are concerned with the business, it 
would be extremely hazardous, not to say foolhardy, for anyone 



THE ORGANIZATION OF BUSINESS loi 

to form a partnership with an individual with whom he was not 
intimately acquainted and concerning whose honesty and ability 
he had the slightest suspicion. Incompetent or dishonest partners 
have caused the financial ruin of many an otherwise sound and 
capable business man. 

The corporation. The modern expansion of business would 
hardly have been possible without some form of organization 
which would permit the association of larger numbers of men than 
are possible under a partnership. This has given rise to the cor- 
poration, or the joint-stock company. The distinguishing differ- 
ence between the corporation and the partnership lies in what is 
known as limited liability. In a corporation the liability of each 
shareholder is strictly limited. The corporation may become bank- 
rupt, but the individual members or shareholders can be called 
upon only for definite sums to make good the debts of the cor- 
poration. In the ordinary case each individual puts a certain 
sum of money into the fund. This may be lost, but he cannot 
be called upon for additional sums to make good further losses. 
In other cases, such as our national banks, the shareholder 
may not only lose what he put into the fund but may be 
assessed an equal amount in addition. This is sometimes called 
double liability. 

Suppose, for example, it were considered necessary to have 
$100,000 of capital with which to start a business. This capital 
may be divided into a thousand shares of $100 each. (A larger 
number of shares of smaller denomination or smaller number of 
larger denomination may, of course, be decided upon.) These 
shares are represented by bits of printed paper which serve as 
evidence to show that the money has been put into the fund. 
A thousand different individuals may buy one share each, or 
a smaller number may each buy a different number of shares. 

For each $100 which any individual puts in, he receives one of 
these bits of paper, which come to be called shares or stock certifi- 
cates or some other such name. After the shares are all sold, 
there is the fund of $100,000 in money available for starting the 
business. 



102 ELEMENTARY ECONOMICS 

The general rule is that each contributor shall have a vote for 
each share which he has purchased. It would therefore be pos- 
sible for one individual to own more than half the shares, pro- 
vided he had invested more than $50,000 in the enterprise. Owning 
more than half the shares, he could always cast the majority 
vote and control the corporation, electing himself and his particu- 
lar friends to all the offices, and virtually controlling the busi- 
ness. In some cases, however, such a concentration of ownership 
is not permitted. 

Limited liability. Only the officers of the corporation are 
empowered to act for the corporation ; the individual shareholder 
who is not an officer has no power to obligate the corporation in 
any way. One therefore does not need to scrutinize the solvency 
or the character of his fellow shareholders as closely as would be 
necessary in a partnership. Again, the individual shareholder has 
no responsibility for the acts of the corporation beyond that which 
has already been indicated; that is, if the business : fails, the af- 
fairs of the corporation may be wound up, but he can lose only the 
sum which he originally subscribed, or, in the case of double 
liability, that sum plus an equal sum. 

Some weaknesses of the corporation. This device of the joint- 
stock company with limited liability has made possible the bring- 
ing together of vast sums of capital running up into millions and 
hundreds of millions of dollars, for the purpose of carrying on 
great business enterprises. Individuals who never saw or heard 
of one another, living in different parts of the country, sometimes 
in different parts of the world, may own shares in the same cor- 
poration, having contributed their money to the joint fund for the 
purchase of the capital needed in the business. 

This has been one of the great factors in building up modern in- 
dustry. It is almost as important as some of the great mechanical 
inventions. But, like all great inventions, it carries with it certain 
difficulties. For example, it has made individual enterprise a prac- 
tical impossibility, except in those cases where small-scale pro- 
duction is as efficient as large-scale production. On the other 
hand, it has given individuals with only small sums of capital to 



THE ORGANIZATION OF BUSINESS 103 

invest the opportunity to participate in the profits of large-scale 
production. In the latter sense it has been a democratic institution. 
The fact, however, that individuals vote in proportion to the num- 
ber of shares which they own has tended to destroy some of the 
democracy and, in some cases at least, to put the management of 
the corporation into the hands of a plutocratic oligarchy. A few 
large shareholders, who control the majority of the stock, can con- 
trol the corporation sometimes even to the disadvantage of the 
small shareholders. Various limitations upon the voting power 
have been proposed and adopted for the purpose of limiting the 
power of the large shareholders. In spite of these, however, many 
a fortune has been built up in the past through the scheming of 
large shareholders. 

Multiplied power and divided responsibility. In any large body 
of men, whether it be a mob or a corporation, if the members are 
all moved by a common impulse they are likely to have a sense of 
power proportionate to their numbers, and at the same time the 
very fact of numbers diminishes each man's sense of responsibility. 
That is why the mob is so like a monster, for the difference be- 
tween a man and a monster is precisely that, — the monster feels 
a sense of power and not a sense of responsibility. 

Something of the same kind exists in the case of the industrial 
corporation. There also you have increased power and diminished 
responsibility. Most of the evils of corporation practice grow out 
of this simple situation, and the remedy must be applied at this 
point. The sense of responsibility must be made commensurate, 
with the sense of power. 

Size a matter of importance. If the principle we have laid 
down is sound, it furnishes no support to the view that the mere 
bigness of a corporation is not a matter for the law to take into 
account. From our point of view bigness is an important factor 
in the problem, for the bigger the corporation the greater its power 
and the less the sense of responsibility on the part of each member. 
That situation alone calls more and more for strict regulation and 
enforcement of responsibility. Its increased power is a good 
thing, provided that power be used for production and not for 



104 ELEMENTARY ECONOMICS 

destruction ; but there is no certainty that it will be used exclu- 
sively for production unless it is subject to the strictest control. 

This does not mean that large corporations have worse dispo- 
sitions than small, or that their members are worse men than the 
members of small corporations or partnerships. It means only that 
the disproportion between power and responsibility increases with 
the size of the corporation. 

As a homely illustration of the importance of size, let us take 
the common house cat, whose diminutive size makes her a safe 
inmate of our households in spite of her playful disposition and her 
liking for animal food. If, without the slightest change of char- 
acter or disposition, she were suddenly enlarged to the dimensions 
of a tiger, we should at least want her to be muzzled and to have 
her claws trimmed ; while if she were to assume the dimensions of 
a mastodon, I doubt if any of us would want to live in the same 
house with her. And it would be useless to argue that her nature 
had not changed, that she was just as amiable as ever, and no 
more carnivorous than she always had been. Nor would it con- 
vince us to be told that her productivity had greatly increased and 
that she could now catch more mice in a minute than she formerly 
could in a week. We should be afraid lest, in her large-scale mouse- 
catching, she might not always discriminate between us and mice. 

Stratification of society. There is another problem, not 
strictly a corporation problem, but a social problem growing 
out of the prevalence of the corporate form of industrial 
organization. That is the problem of the widening gap between 
employers and employed or, more strictly, between capitalists 
and laborers. It may be laid down as a general social law that 
anything which separates people into sharply distinguishable 
groups, whether it be a geographical boundary, a racial dif- 
ference, a difference of religious creeds, or a class distinction, will 
produce, between the groups thus separated, first ignorance of one 
another, then suspicion growing out of that ignorance, then mis- 
understanding growing out of that ignorance and suspicion, and 
finally open warfare whenever a pretext is found ; whereas any- 
thing which bridges over these gaps, or brings people together 



THE ORGANIZATION OF BUSINESS 105 

regularly and normally, creates, first, knowledge of one another, 
then confidence instead of suspicion, then understanding instead 
of misunderstanding, and finally lasting peace because no difficulty 
seems large enough to serve as a pretext for war. 

Now the joint-stock form of organization, though a most effec- 
tive industrial device, has had at least one serious social result: 
it has widened somewhat the gap which would otherwise have 
existed between the employing group and the employed group. 
When employers are known as persons having Christian names, 
and can come in some kind of personal or direct contact with 
employees, and when, therefore, employer and employee know 
something about one another, there can be no such degree of sus- 
picion of one another as now exists ; where ignorance disappears, 
suspicion tends to disappear also. But when employers stand, as 
the shareholders of a corporation, in a purely impersonal relation 
to employees, when the average employer or shareholder knows 
nothing personal about the laborers, and the laborers know noth- 
ing about the shareholding employers, there is on either side of 
the line about as great a degree of ignorance of those on the other 
side as can be found anywhere in modern social life. 

Widening the gap between social classes. Such a state of 
things has never failed in the history of the world to produce sus- 
picion, jealousy, misunderstanding, and, on the slightest pretext, 
open hostility ; and, so far; as we are able to see into the future, 
there is not the slightest ground for hoping that such a condition 
ever will fail to produce these same undesirable results. In other 
words, we need not hope for social peace, or for stopping the 
conflict of classes, until that chasm is in some way bridged over 
or made to disappear. 

This result can hardly be achieved by doing away with joint- 
stock corporations. They are so effective as industrial devices 
that we could scarcely get along without them ; nevertheless, if we 
are ever to have anything resembling social peace, some way must 
be found to bring the employing classes and the employed into per- 
sonal relationships one with another. The ideal is undoubtedly that 
of having the workers in our industrial establishments purchase 



io6 ELEMENTARY ECONOMICS 

the stock of the corporations. If that result could possibly be 
achieved, there would be an end of the present phase of warfare. 

The trust. It is important that we distinguish between the 
corporation, as we have just described it, and the trust, or combine. 
The corporation is an organization of individuals who put their 
capital together in order to carry on a business which require^ 
more capital than is likely to be possessed by any one of them. 
The trust, or combine, is mainly an organization of corporations 
(though it may include also a few individual capitalists), for the 
purpose of controlling the market. While such organizations are 
to be distinguished sharply from corporations as such, nevertheless 
they could scarcely have come into existence if the corporation 
had not preceded them and prepared the way. They may therefore 
be called extreme developments of the corporation idea, though 
not necessary developments. As to these extreme developments 
of the corporation principle, it is becoming more and more appar- 
ent that their power for evil lies wholly in their power of con- 
trolling and manipulating prices. If that power could be taken 
out of their hands, we should then have nothing to fear from them. 

Control of prices. If they could not succeed and survive in 
competition through their power over prices, they could then suc- 
ceed only through their power of production. If they should then 
survive, the mere fact of their survival would prove their fitness to 
survive. This has been pointed out many times by scholars ; but 
the practical politicians, with their unerring instinct for the wrong 
way, have ignored it and have been trying various hard and useless 
methods of dealing with the problem. Eventually, after having 
tried every possible way of going wrong, we shall apply the simple 
and direct remedy of government control of prices wherever a 
monopoly exists. 

It is not necessary to indulge in any sentimental rhapsodies on 
the subject of the people and their control over affairs of this 
kind. Government affairs are controlled by politicians, and poli- 
ticians are no more interested in the people than are the trust 
magnates themselves. The choice is a hard one. But where com- 
petition fails to regulate prices, these prices are certain to be fixed 



THE ORGANIZATION OF BUSINESS 107 

arbitrarily by someone. In the absence of government control 
they are fixed by the trust operators alone. Where there is govern- 
ment control, they are fixed partly by the politicians and partly by 
the trust operators. The interests of these two groups are not the 
same, and, as the result of their pulling and hauling, prices will 
not be fixed quite so completely in the interest of either group, 
but more in the interest of the people, than if the prices were fixed 
by either group alone. The people can exercise a partial control 
over the trusts by refusing to buy from them, and over the poli- 
ticians by refusing to vote for them. Through both methods of 
control the interests of the people will be somewhat better safe- 
guarded than through either method alone. 

Incidentally this would destroy most of the trusts. No trust 
exists by virtue of its superior productive powers. Each one de- 
pends for its existence upon its superior power in buying or sell- 
ing ; that is, upon its power over prices. Take away this power, 
and enable the outside concerns to match their productivity with 
that of the trust, and outside competition will increase and force 
the trust to break up into its most efficient productive units, as 
distinguished from the most efficient bargaining units. 

The cooperative society. It has often been proposed to sub- 
stitute a radically different form of business organization for the 
corporation, or joint-stock company. This is known as the co- 
operative society. In a sense the corporation itself is cooperative, 
but it differs from the cooperative society in two fundamental char- 
acteristics : In the first place, the corporation involves cooperation 
among the owners, whereas the true cooperative society involves 
cooperation among the workers. In the chapter on Capital we saw 
that the rise of modern industrial conditions had brought about a 
sharp separation of owners and workers. In the original form of 
manufacturing — that is, the small shop, where the workman owned 
the shop and the tools — we had the functions of ownership and of 
labor combined in the same individual. With the rise of the fac- 
tory system these two functions were separated. The corporation 
represents the organization of owners and maintains the separation 
of owners from workers. The cooperative society, on the other 



io8 ELEMENTARY ECONOMICS 

hand, represents an association of workers. Under the corporation, 
ownership and management go together; under the cooperative 
society, labor and management go together. In the second place, 
in a corporation, as we have seen, the various individuals who 
contribute capital vote in proportion to the number of shares which 
they own. In a cooperative society each individual has one vote, 
regardless of the number of shares which he owns or the amount of 
capital which he has put in. One man one vote is the rule here, 
whereas one share one vote is the rule of the corporation. 

As to the comparative merits of these two forms of organization, 
the opinion of the world is somewhat divided. It must be ad- 
mitted that the corporation has had much the larger growth, 
though in recent years the cooperative society has been gaining 
ground rapidly. 

Comparative merits of the corporation and the cooperative 
society. It is the opinion of the present writer that the question 
will always be decided on rather definite economic grounds. Where 
the difficult problem is that of getting sufficient capital, he who 
supplies the capital must be given control ; that is to say, where 
everything else is easily obtainable, where there are always plenty 
of laborers seeking employment, plenty of raw material to be had, 
and buyers ready to buy the finished product, but where the limit- 
ing factor is capital and the puzzling thing is to know where to 
get capital, favorable terms must be offered to the capitalist and 
he must be allowed to have his way, otherwise the capital cannot 
be secured. In the early stages of manufacturing expansion 
capital was the limiting factor. 

The limiting factor will dominate. Now and then conditions 
arise under which capital is not the limiting factor. Among farmers, 
for example, where a creamery is needed, it is never very difficult 
to raise capital enough to equip the creamery ; the difficulty is to 
get business, — that is, to get the farmers to produce the milk for 
the creamery. In these cases the producer of milk must be placated 
and persuaded to join the organization. He must therefore be 
given control. This gives rise to what is known as the cooperative 
creamery, in which the producing farmers own the plant, direct 



1 



THE ORGANIZATION OF BUSINESS 109 

its management, and share in its profits. Such a creamery, how- 
ever ^ is cooperative only in a special sense. The men who work in 
the creamery are employed as other laborers would be employed 
in a privately owned factory of any kind. 

A cooperative store is dependent upon custom. It is easier to 
get capital and to hire clerks and salesmen than it is to induce 
people to trade at the store. Therefore the patrons of the store 
must be given some control. 

The great cooperative societies, as pointed out in the chapter on 
Cooperation, have been societies where cooperative buying and 
selling were substituted for competitive buying and selling ; that 
is, they have been mercantile societies. They do not represent co- 
operation among producers or among the workers in the stores and 
factories, for the workers in the stores and factories are hired on 
the same terms as workers in the privately owned or corporation- 
owned stores and factories. 

There are a few cases of real cooperation, but they are not very 
conspicuous. The only real cooperation is cooperation among 
workers, where the men who do the work in a factory manage it 
themselves or direct its management and furnish or hire the capi- 
tal. This form of cooperation has not yet proved very successful, 
mainly because labor has seldom been the limiting factor. It is 
generally so easy to get labor that the laborer does not have to be 
given much control. When the time comes, as it probably will, 
when labor is scarce and hard to find, when it is harder to per- 
suade the laborer to work than to persuade the capitalist to invest 
or the purchaser to buy the finished products, — then we may 
expect that this form of cooperation will gain ground. 

Control by the indispensable person. Generally speaking, the 
indispensable man, whether he be the one who furnishes capital, 
the one who furnishes raw material (as in the case of the cooper- 
ative creamery), the one who buys the finished product (as in 
the case of the cooperative store), or the one who supplies the 
labor (as in the case of the true cooperative society), is in so 
strong a position that he can dictate terms to all the others. 
When the laborer becomes so indispensable — that is, so scarce 



no ELEMENTARY ECONOMICS 

and hard to find that the average business enterprise must wait 
on his will — he will be in so strong a position that he can bargain 
on equal terms with all the others who participate in the enter- 
prise. He will then, without resort to force, really have a part in 
directing its management on a purely voluntary basis. 

There is not a very good prospect for cooperation among labor- 
ers under any other conditions. There is a strong probability 
that, with the rapid accumulation of capital (especially if habits 
of frugality and saving are encouraged), there will come a time 
when capital will be in danger of unemployment because of its 
great abundance, and every individual laborer will become almost 
indispensable because of the scarcity of labor. Then we must ex- 
pect that capital will lose the power to direct exclusively the 
management of industries and will take the position of a hireling. 
The laborer will then gain control and assume the position of the 
master. 

EXERCISES 

1. Why is it necessary to combine the wealth of large numbers of 
men in modern business? 

2. What are the principal methods of combining this wealth? 

3. What are the disadvantages of the partnership? 

4. Would it be possible for several hundred or several thousand men 
to work together in a partnership? Why not? 

5. How does a corporation differ from a partnership? 

6. What are the advantages of the corporation? 

7. What is meant by limited liability ? 

8. What is meant by a trust? What is its purpose? 

9. How does a cooperative society differ from a joint-stock cor- 
poration ? 

10. What are the comparative merits of the corporation and the 
cooperative society? 



CHAPTER XIII 
THE ECONOMICAL USE OF LABOR ON LAND 

Fertility and location. Land is, of course, one of the original 
and fundamental necessities of national life. Some of the most 
necessary qualities of land, however, are as free as air and sunlight. 
Land, for example, must possess a certain degree of solidity to 
support ourselves and our buildings, but one can find solid land 
almost anywhere and most of it can be had free of charge. It is 
necessary also to have room, but we can get plenty of room with- 
out having to pay for it. Fertility, however, is limited, and the 
most fertile lands are very scarce. Therefore, if we want land of 
the most fertile kind we are likely to find that a good many others 
want it also and that we shall have to bid against them if we are 
to get it. Some land is better located than the rest, and land in 
the best location is so scarce that we have to outbid a good many 
others if we are to get it. 

Since there are so many grades of land, from the standpoint 
of fertility and of location, it follows that land has no uniform 
value, but each piece has a value of its own, depending upon these 
two qualities. There is plenty of land so poor in these two qual- 
ities that you can get it for little or nothing. Some is so desir- 
able, with respect to one or both of these qualities, as to give it 
an almost fabulous value. The differences in the value of lands 
within a city are due almost wholly to differences in location. In 
agricultural communities location is a factor, but not the only nor 
the most important factor, in determining land values. Nearness 
to market or to railroads, the character of the wagon roads, acces- 
sibility to schools and other social advantages, count for much ; 
but the character of the soil and the subsoil, the climate, the 
moisture, and the other factors which determine plant growth 
count far more. All these factors which promote plant growth may 



112 ELEMENTARY ECONOMICS 

be grouped under the name " fertility." In that case we may say 
that, from an economic point of view, location and fertility are 
the most important properties of agricultural land. 

Good location saves transportation. When we look for the 
reason why location is a matter of such importance, we must recall 
the fact that man's chief work, on the physical side, is the moving 
of materials. It is this which requires power ; and power is costly, 
whether it be generated in the human body and exercised through 
the muscles, or whether it be developed in the bodies of animals 
or through mechanical agents. One very important phase of the 
work of moving materials is that of marketing products. The 
nearer a body of land is to a market, and the better the means of 
transportation, the less labor and power it takes to get its prod- 
ucts to market. On land which is well located with respect to 
markets it is therefore possible to utilize labor more efficiently 
than on land which is badly located. 

It is also costly to move man himself. It is therefore advan- 
tageous that he should live in close proximity to his work. If he 
lives far away, the cost of transportation is greater, and the labor 
force of the community is less efficiently applied, than if he lives 
close by. Even though the trolley fare is the same for a long as 
for a short distance, transportation costs the community more over 
the long distance. In the first place, it takes a longer time and 
the passenger loses that time. In the second place, it costs the 
transportation company more, and that extra cost must ultimately 
reduce the total productive power of the community. 

Access to food supplies. It seems to be a general rule, apply- 
ing to all forms of life, that numbers depend upon food supply. 
Where food is abundant, numbers may be large. Since food comes 
ultimately from the soil, the capacity of the soil to produce 
food places a limit upon numbers. One of two things must, of 
course, follow: a large population must either spread over wide 
areas of land in order to find sufficient food or it must transport 
food from these wide areas where it is produced to the densely 
populated centers where the people live. If we were not able to 
transport food and other supplies such long distances, our large 



THE ECONOMICAL USE OF LABOR ON LAND 113 

cities would be compelled to scatter and build many smaller cities, 
or else live as scattered families, in order to be nearer the sources of 
supply. Even with our present means of transportation there are 
limits beyond which it does not seem advantageous to concentrate 
our population. 

Increasing floor space by erecting tall buildings. The neces- 
sity for room for the indoor industries can be supplied in part by 
tall buildings. Floor space can be increased by as many stories 
as can be built, subtracting, of course, the space necessary for 
elevators, stairways, airshafts, etc. But after a very moderate 
height is reached, the cost of construction increases more than in 
proportion to the added floor space. To add one more story on 
the top of a tall building requires stronger walls all the way down 
and also a better foundation. Besides, it costs more to carry the 
building materials to the greater height ; the cost of elevator serv- 
ice to the top floor is somewhat higher than for lower floors. 
A twenty-story building is of a very moderate height in some of our 
large cities where land is very scarce ; but even this height would 
be absolutely unprofitable in a town where there was plenty of 
room on the ground. 

Streets. The traffic needs of a busy population also make de- 
mands upon land for streets. Much the same methods are used to 
economize land for street purposes as for building purposes. The 
building of subways, sub-subways, elevated roads, and viaducts is 
a familiar method. It used to be suggested in a jocular way that 
a road through the air would also economize land. Flying ma- 
chines may eventually transform that joke into a real economy. 
Superior pavements for the support of larger and more powerful 
vehicles will also economize road space somewhat by permitting 
more traffic to be carried on over a street of given width. 

Economizing agricultural land. These methods of economiz- 
ing land are suited to urban rather than to rural districts. Space 
is required in agriculture, as suggested above, for the utilization of 
solar energy, soil, and moisture in plant growth. "Two-story 
farming," as Professor J. Russell Smith calls it, consists in grow- 
ing tree crops with ground crops underneath. Some space can be 



114 ELEMENTARY ECONOMICS 

saved in these ways, provided there is plenty of sunlight, soil, 
moisture, and other elements of plant growth. 

Intensive farming. "Two-story farming" is only one phase 
of intensive agriculture, which may be defined as the use of large 
quantities of labor and capital in the cultivation of relatively 
small areas of land in order to get large crops per unit of land ; 
that is, large crops per acre. As will be shown in Chapter XIV, 
extreme efforts to increase the productivity of land tend to de- 
crease the productivity of labor ; that is, to reduce the product 
per unit of labor. When a country becomes thickly populated, 
however, if its people are unwilling to migrate to countries where 
land is abundant, the problem of economizing land becomes one of 
great importance. So long as the people can find outside markets 
for the products of indoor industries, they may sell these products 
to foreign peoples and buy the products of the soil from less 
densely populated countries. When these outside markets cease 
to expand, and the population is therefore compelled to live more 
and more from the products of its own soil, it must perforce get 
more and more out of its soil. Intensive agriculture is then forced 
upon it. Yet, as a matter of observed fact, highly intensive agri- 
culture the world over is associated with the poverty of those who 
actually work on the soil. 

Turning to heavy-yielding crops. If people would change 
their habits of consumption and consume products which could be 
economically produced under intensive methods or products which 
are capable of yielding large quantities of food per acre such as 
potatoes, parsnips, and beans, instead of wheat and beef, a great 
deal of land could be saved ; in other words, a much larger popu- 
lation could be supported from a given area. 

Turning to the indoor industries. It is not likely to be re- 
peated too often that the favorite method of economizing land 
and supporting a large population is to give up trying to be 
physically self-supporting and to become commercially self- 
supporting. By being physically self-supporting is meant pro- 
ducing from our own soil all or practically all that we need. By 
becoming commercially self-supporting is meant bringing in the 



THE ECONOMICAL USE OF LABOR ON LAND 115 

products of the soil from other countries, selhng to those countries 
in return the products of the mines and the indoor industries. 
The products of the indoor industries may themselves be made 
from imported raw materials. In this case we bring in raw mate- 
rials, work them up into finished products, and sell them again 
to outside people, living ourselves upon the profits of the transac- 
tion. We virtually sell our labor to other nations. 

Indoor industries limited by market. This method of building 
up a great population has such vast possibilities, provided we are 
so situated as to be able to do it, as to appeal powerfully to the 
imaginations of statesmen and nation builders. But if outside 
markets fail, then we must turn to the development of our own 
soil, for in that case we must become physically self-supporting. 

The pent-up versus the expanding type of civilization. Even 
though we aim to become physically self-supporting, we have two 
distinct lines of development open to us: one is to develop an 
oriental, or pent-up, type of civilization ; the other is to develop 
an occidental, or expanding, type of civilization. By an oriental, 
or pent-up, type of civilization is meant a civilization in which 
we try to live on our existing area of land and to support a grow- 
ing population without adding to our productive area, as is done 
in China and India. This leads to a gradually increasing intensity 
of cultivation and a gradual lowering of the standard of living of 
those who work on the soil, and eventually of the masses of the 
people. By an occidental, or expanding, type of civilization is 
meant a civilization in which the effort is made to maintain a 
high standard of living and a large product per man by widening 
our cultivated area as the population grows rather than by culti- 
vating the original area more and more intensively. When our 
ancestors came to this continent and later spread over it, they 
were developing an expanding tj^e of civilization. 

Our people have preferred to expand over more land rather than 
to try to live on the original area, whatever that original area may 
have been. It is difficult to see where this tendency will lead us, 
but it is a rather striking fact that, from the Greeks down to the 
nations of the present, every great European nation has been a 



1 1 6 ELEMENTARY ECONOMICS 

colonizing nation. Thus people have preferred to go where land 
was abundant, rather than to stay where population was dense. 
Unless we change our habits very decidedly, we shall probably 
continue to do the same in the future ; that is, we shall try to 
maintain our standard of living. When this cannot be achieved by 
intensive cultivation, we shall swarm, or send out colonists ; that 
is, some people will emigrate. The only alternative would be the 
maintenance of a stationary population through birth control. 

EXERCISES 

1. What are the two factors which give value to land? 

2. Why is location so important? 

3. What are some of the means of economizing space (i) in cities? 
(2) in the country? 

4. What is meant by intensive farming? 

5. Is it a means of economizing labor or of economizing land ? 

6. What fixes the limit to the development of indoor industries in a 
country? 

7. What is the difference between a pent-up and an expanding type 
of civilization? 

8. Which is preferable for the United States ? 



CHAPTER XIV 

KEEPING A PROPER BALANCE AMONG THE 
FACTORS OF PRODUCTION 

Combinations must be balanced. In the production of almost 
any article it is necessary to make use of a great many things, 
different kinds of material, different kinds of tools or machines, 
and different kinds of labor. All these elements that enter into its 
production must be combined in certain proportions in order to get 
the most satisfactory results. This is true not only of producing 
a chemical product and of cooking a dish ; it is equally true of 
growing corn, feeding cattle, manufacturing cloth, or producing 
anything else. 

If things are thrown out of balance some unsatisfactory result 
is certain to follow, even if the product itself is not spoiled. This 
unsatisfactory result may show itself on the market in unsatis- 
factory prices, even if the producer refuses to spoil the product by 
a bad mixture. He may refuse to buy all of one ingredient that 
happens to be too abundant to balance the limited quantity of 
another ingredient. If, for example, sugar is scarce and cran- 
berries abundant, cooks and housekeepers may refuse to buy more 
cranberries than can be sweetened with the limited supply of 
sugar. Cranberries will then be hard to sell. 

Balanced ingredients. In the manufacture of old-fashioned 
gunpowder, to take another example, charcoal, saltpeter, and sul- 
phur were required, and they had to be combined in fairly definite 
proportions. If it happened that there was more charcoal on the 
market than would combine with the limited supply of one of the 
other ingredients, say saltpeter, the production of gunpowder was 
limited by the small supply of saltpeter and not by the supply of 
charcoal. 

117 



Il8 ELEMENTARY ECONOMICS 

Balanced agents of production. This principle applies not 
only to raw materials which are used in various lines of production 
but to the active agents themselves, such as labor. However 
numerous the hodcarriers might be, if there were a great scarcity 
of brick and stone masons, not many hodcarriers could be used. 
At bottom this is much the same problem as that of balancing 
rations or fertilizers. 

A balanced nation. This principle of balancing up the factors 
of production is just as important for the nation as a whole as it 
is for the individual farmer or manufacturer. The country which 
possesses a surplus of land and a scarcity of labor will find that 
its land is very ineffectively used. What it needs is more labor. 
It cannot very well sell its land, but it will in all probability pursue 
a policy which will increase its labor supply. Labor under such 
conditions will be in great demand, and for the same reason that 
in dietetics protein will be in great demand if it is scarce while 
the other food elements are abundant. In such a community land 
is certain to be cheap and labor dear. The high price of labor, 
the ease with which men can establish themselves on the land as 
independent farmers, or get remunerative work, encourages im- 
migration on the one hand, and, on the other hand, early marriages 
and large families among the native born. This is especially true 
on the farms, where labor is scarce and land abundant. Every 
additional child is money in the farmer's pocket, because as soon 
as the child is old enough to work he helps to solve the ever- 
present problem of scarcity of labor. Thus, from two sources the 
labor supply is increased in response to the effort to balance the 
factors of production. 

But tools and equipment of all kinds, which are generally in- 
cluded under the word "capital," are almost, though not quite, 
as essential as either labor or land. If capital is scarce while the 
other factors are abundant, it will be in great demand, for the 
same reason that labor is in great demand where it is scarce and 
land abundant. 

An overpopulated country, on the other hand, finds itself with 
a badly balanced industrial system, but the balance is in this case 



KEEPING A PROPER BALANCE 119 

disturbed in the opposite direction. Land being the scarce factor, 
every acre that can possibly be used is of the utmost importance. 
Labor, on the other hand, is cheap. It can easily be spared. If 
it sees fit to emigrate to other countries, no great effort is made 
to prevent it and no high price is offered it as a reward for staying 
at home. Under such circumstances, to hold an acre of land out 
of use would seriously reduce the total production of the com- 
munity, whereas to lose a laborer by emigration is no great loss. 

The fundamental problem of scientific management. The 
fundamental problem of all management, whether it be the man- 
agement of a diet kitchen, a farmer's feeding lot, a farm as a 
whole, a factory, a railroad, or a nation, is the problem of balanc- 
ing the factors of production. 

A balanced population. The greatest danger of all, however, 
and the one which, apparently, is least appreciated by some of our 
statesmen, is that of producing a badly balanced population. At 
the beginning of this chapter the question of the balancing of the 
hodcarriers and the brick and stone masons was mentioned. This 
may be taken as typical of the necessity of balancing skilled labor 
and unskilled labor. To have more unskilled labor than can be 
used effectively with the limited supply of skilled labor is quite as 
bad as to have more people than can be supported on the land, 
or fewer people than are necessary to utilize the land. To have 
more manual labor than will combine effectively with mental 
labor, to have more mental laborers who are capable of doing 
only routine work than will combine effectively with those mental 
laborers who possess originality, inventiveness, and the power of 
leadership, is also to produce a bad balance. 

Probably the most important of all problems of statesmanship, 
and at the same time one of the most difficult, is that of balancing 
the population so that no particular class of labor is either over- 
supplied or undersupplied with respect to any other class. One 
method of preserving the balance is by education and vocational 
guidance. Training men for the occupations where men are 
needed, as evidenced by the high wages and salaries paid, is one 
of the quickest and most effective ways of preserving the balance. 



120 ELEMENTARY ECONOMICS 

Whenever any occupation is so undermanned as to make it difficult 
to find workers, wages or salaries will tend to rise. This increase in 
remuneration is then a standing invitation to young men to pre- 
pare themselves for that work, and a properly conducted educa- 
tional system is a standing opportunity to young people to accept 
the invitation. 

Differential birth rates. A wholesome moral life would also 
be a powerful agency working in the same direction. Those who 
have demonstrated that they are needed by the fact that they can 
fill good positions for which there is a demand, where incomes are 
consequently large, are the ones who ought to reproduce their 
kind most abundantly. Unfortunately, in most modern com- 
munities, they are the very people who multiply least rapidly. 

Geographical redistribution of population. That it is better 
for a growing population to have more land than to remain 
cooped up in its original home is the idea on which a great 
deal of the history of the world has been made. The migra- 
tions of peoples in search of more land is one of the large aspects 
of human history. There could be no possible object in seek- 
ing more land, instead of remaining content with the land in 
the possession of the people, were it not for the fact of diminish- 
ing returns. Therefore a very discriminating writer^ has stated 
the opinion that the law of decreasing returns is the funda- 
mental fact of human history. The effort of a growing population 
to acquire more land is, from the standpoint of the present chapter, 
merely an effort to restore the balance between factors of pro- 
duction. In any given state of civilization too dense a population — 
that is, too much labor and too little land — works to the disad- 
vantage of the people. When they begin to perceive that they 
would be better off if they had more land, nothing except a strong 
military guard or a Chinese wall will prevent emigration. 

Migration of capital. But capital follows the same law. In a 
community where the land and labor are not properly balanced 
with an adequate supply of capital, the perception of a need 

1 Edward Van Dyke Robinson, " War and Economics," Political Science 
Quarterly^ Vol. XV, pp. 581-622. 



KEEPING A PROPER BALANCE 121 

for more capital — that is, tools and equipment — is likely to be 
pretty clear and definite. This leads to the offer of high rates of 
interest as an inducement to capital to come. The fortunate in- 
dividual who can gain possession of an additional fund of capital, 
being able to increase his product considerably, finds it economical 
to pay a high rate of interest for it rather than not to get it. If 
he owns his own capital, whereas his competitors in production 
lack capital, he will have a great advantage over them and will 
therefore secure a large income. According to our analysis in the 
chapter on The Source of Interest, this additional income which he 
gets from the use of his own capital is interest as truly as the in- 
come which he gets from lending his capital to someone else. 

EXERCISES 

1. Are there many things that can be produced without a combina- 
tion of factors ? • 

2. Does it make any difference in what ratios the factors are 
combined ? 

3. In case the factors are not to be found in the right proportions, 
which factors are likely to be more desired, those which are scarce 
or those that are abundant? 

4. Which would add more to production, to add to the quantity 
of the scarce factor or to add to the quantity of the abundant factor ? 

5. What is meant by a balanced nation? 

6. What is the fundamental problem of scientific management? 

7. What is meant by a balanced population? 

8. What are some causes that tend to throw the population out of 
balance ? 

9. What could be done to restore the balance? 



PART THREE. THE PRODUCTIVE 
ACTIVITIES 



I 



CHAPTER XV 
WAYS OF GETTING A LIVING 

In Part One we considered the underlying conditions of 
national prosperity. We found the most important of these condi- 
tions to be a good geographical situation and a vigorous, intelli- 
gent, and progressive people. Of these two we found the latter 
to be of vastly the greater importance. Much depends upon the 
quality of the people and much upon their ways of doing things. 
In Part Two we considered the principal means by which the labor 
power of the people may be economized, to the end that produc- 
tion may be increased without putting an increased burden of 
physical labor upon the people. In Part Three we are to con- 
sider the principal activities in which men engage in prosperous 
countries, these being the activities that make the countries pros- 
perous. Men engage in these activities, in the main, for the pur- 
pose of getting a living ; but while this is usually their purpose, 
the result of pursuing these activities is that individuals make the 
nation prosperous while trying to become prosperous themselves. 

Individual and national prosperity. It must be understood, 
however, to begin with that some individuals may sometimes, if 
the laws permit, gain at the expense of the nation, whereas most 
of the others gain by adding to the prosperity of the nation. 
Some may, if they are permitted to do so, gain wealth at the ex- 
pense of the rest of the people, while others gain wealth by con- 
tributing useful service and producing useful things for the rest of 
the people and receiving good pay for their services and their 
products. It is of the utmost importance that we understand what 
activities enrich the nation as well as the individuals who carry 
them on and what activities may enrich the individual at the 
expense of the nation. 

125 



126 



ELEMENTARY ECONOMICS 











'War 












Piracy 




Plundering 




Robbing 




'Harmful^ 


Swindling 
Counterfeiting 
Adulterating goods 




' Uneconomical . 


• 


Monopolizing 
^ Terrorizing 






f 


Marrying wealth 






^Neutral. 


Inheriting wealth 






Benefiting through a rise in land 






values 






' Hunting 
Fishing 


Ways of 




'Extractive- 


Grazing 


ACQUIRING- 






Lumbering 


Wealth 






Mining 






'Primary in- 




'Tillage 






dustries 




Plant 










' Agriculture - 


breeding 












Animal 








. Genetic 




[^ breeding 








Forestry 








^ Fish culture 




>^ Economical' 




Manufacturing 




Secondary industries - 


Transporting 
Storing 






Merchandising 






' Healing 






Teaching 




^ Personal and professional services- 


Inspiring 




Governing 
















L^ 


.musing, etc. 



Economical and uneconomical ways. The diagram above 
should be studied very carefully. In this diagram the ways of 
acquiring wealth are divided into two main classes — the un- 
economical and the economical. From the social or national 
point of view it is uneconomical to have men acquiring wealth 



WAYS OF GETTING A LIVING 127 

by methods which do not add to the total wealth or well-being 
of the society or the nation. When one man gains something by 
plundering, swindling, counterfeiting, or monopolizing, someone 
else loses a like amount, and nothing is added to the total. In 
fact, if these harmful methods become general, it is likely to dis- 
courage honest industry and actually diminish the total production 
of wealth. Even the neutral methods may become harmful if they 
result in wasted lives ; that is, if they enable men and women who 
would otherwise be productive and useful to live in idleness and 
luxury. The smaller the proportion of the people who live by 
means of the uneconomical methods, the more prosperous the 
nation is likely to become. 

By the economical ways of acquiring wealth are meant all those 
ways by which an individual contributes to the wealth of the whole 
community as much as he gains for himself. He may make his 
contribution by laboring either to produce commodities or to 
render direct service to some of his fellow men. In either case, 
where he gives honest service for honest pay he is enriching some- 
one else in proportion as he himself is enriched. A nation in which 
this rule prevails universally, where everyone is contributing to 
the well-being of someone else in exact proportion as he himself 
prospers, has at least one of the conditions of general prosperity. 
If each one is capable and well trained, so that he can give efficient 
service, — that is, if he contributes largely to the prosperity and 
well-being of someone else, — then everyone is prosperous, which 
is the same as saying that the nation as a whole is prosperous. 

Economical ways of getting wealth. The economical ways of 
getting a living are subdivided into three classes : first, the primary 
industries ; second, the secondary industries ; and, third, profes- 
sional and personal service. The primary industries are those 
which produce commodities directly from their original and natural 
sources, — which take material as nature provides it and appro- 
priate it to some human use or change it from a form which is not 
usable to a form which is either usable or one stage nearer to 
usableness. For example, the elements which produce plant 
growth are not, in their natural state, available for human use. 



128 ELEMENTARY ECONOMICS 

The farming industry converts these elements into something 
which is either usable, as in the case of fruits and vegetables, or 
at least one stage on its way toward it, as in the case of grain or 
live stock. The secondary industries are those which take the 
products of the primary industries which are in need of further 
modification and carry them through the remaining stages on their 
way to final Usefulness. The farmer's grain, besides being trans- 
ported long distances from places where there is a surplus to other 
places where there is a shortage, must also be stored from thresh- 
ing time until it is needed by the consumers, and it must be ground 
into flour and baked into bread or manufactured into some other 
form of food before it is ready for use. 

Personal and professional services include all lines of work which 
do not directly produce salable commodities. Lawyers, doctors, 
preachers, teachers, actors, barbers, policemen, and even public 
officials, besides multitudes of others, are performing professional 
and personal services. 

Necessity of repressing uneconomical ways. It is apparent 
that if all uneconomical ways of getting a living could be repressed, 
at least all the harmful ones, it would be a good thing to repress 
them. Then everyone would be compelled to get his living, if at 
all, by doing things that would enrich the rest of the people as 
well as himself. The nation would then prosper more than it 
possibly could if a considerable part of the people wasted their 
working power in doing harmful or useless things rather than 
useful or productive things. 

Difficulty of repression. The coarser forms of crime and fraud 
are pretty effectually repressed now in all civilized countries, but 
there are some more refined forms that are difficult to repress by 
law. False advertising, overzealous salesmanship, political cam- 
paigning that verges on demagogy, public discussion in which 
illogical and unsound arguments are used, are very difficult to 
control by law. Even to attempt to control them opens the govern- 
ment to the charge of interfering with the freedom of speech or 
the liberty of the press. The result is that it is still possible to 
gain trade or political office by mild and subtle forms of deception, 



WAYS OF GETTING A LIVING 129 

if one is unscrupulous enough to use these methods and skillful 
enough to use them effectually. 

Not skill but service. There is a certain popular belief, fortu- 
nately growing less popular, that skill is entitled to a reward. If 
that were true the skillful swindler would be entitled to the re- 
sults of his skill. Not skill but service should be the basis of 
reward. In other words, when skill is used serviceably, it is en- 
titled to a reward, otherwise not. 

The way of usefulness versus the way of violence. Even vio- 
lence and terrorism are still used to a certain extent. There are 
still, in fact, two widely different methods of getting what you 
want. One is to make yourself so useful that others are glad to 
pay you, or to give you what you want, in return for your service 
or your product ; the other is to make yourself so dangerous that 
others will be afraid to refuse you what you demand. The one 
pursues the method of voluntary agreement among free citizens ; 
the other pursues the method of force. The one appeals to good 
will ; the other to fear. The one is constructive ; the other is 
destructive. The one is the method of civilized men, — that is, 
of men who have learned the art of living and working peaceably 
together in large numbers ; the other is the method of savages — 
that is, of men who have not learned how to get along peaceably 
together. 

Real distinction between civilized and savage men. This is 
really the broadest distinction between the civilized man and the 
savage. The civilized man has many vices as well as many virtues, 
and the savage likewise. Some vices the civilized man possesses in 
greater degree than the savage man. But the savage has one fatal 
weakness that will always, until he loses it, hold him down and 
prevent his tribe from rising to prosperity and power. He is prone 
to use force at times and not to rely wholly upon persuasion, — 
to get what he wants by making himself so dangerous that other 
people will be afraid to refuse his demands. With all his vices 
the civilized man has one supreme virtue that will always, so long 
as he keeps it, keep him ahead of the savage. He relies primarily 
upon persuasion and good will as means of getting what he wants. 



130 ELEMENTARY ECONOMICS 

He tries to get what he wants by making himself so useful that 
others will be glad to pay him for his product or his service. This 
is the only way in which men can live together in large numbers 
without fighting among themselves. They who can live and work 
together peaceably in large numbers will always prosper more than 
those who cannot. 

Why civilized men are more prosperous than savages. There 
are fundamental reasons why those people who can live and work 
together in large numbers without fighting among themselves will 
always prosper more than those people who cannot. All the energy 
of those who have learned this art can be used in production and 
service. That makes prosperity. Those who have not learned it 
waste a great deal of their energy in destructive fighting, and, in 
addition to wasting their productive energy, they destroy much 
that is already produced and discourage others from trying to 
produce. 

No nation is wholly civilized or wholly savage. In other words, 
a civilized nation is not one in which all are civilized and none 
savage; it is rather one in which the balance of power is held 
by the men of peace and the men of violence are held in check. 
A savage nation is not one in which all are savage and none 
civilized ; it is rather one in which the men of violence hold the 
balance of power and the men of peace have no chance. 

The duty of being civilized. In view of what has been said 
in this chapter, anyone who really cares to see his country grow 
prosperous and great must study the differences between the 
economical and the uneconomical ways of getting a living. He 
must then be careful, first, to select an economical rather than 
an uneconomical way of making his living, and, second, he must 
throw the weight of his influence against all uneconomical ways. 
These must be discouraged, particularly the harmful ways, by law 
and by public sentiment, while all economical ways must be en- 
couraged in every possible way, by favorable laws, by public senti- 
ment and social esteem, and by private example. 



WAYS OF GETTING A LIVING 131 

EXERCISES 

1. What is the difference between an uneconomical and an economi- 
cal way of getting a living ? Name some occupations that come under 
each of these two classes. 

2. How would you classify the economical ways of getting a living? 

3. What are the primary industries? 

4. What are the secondary industries? 

5. Why is it advantageous for the government to repress the un- 
economical ways of getting a living ? 

6. Why is it better to get what you want by making yourself 
useful than by making yourself feared? 

7. Why are civilized men more prosperous than savages? 



CHAPTER XVI 
THE EXTRACTIVE INDUSTRIES 

In the last chapter the rather obvious fact was stated that the 
prosperity of the nation depends upon the usefulness of its citizens. 
One of the surest ways. of increasing the usefulness of the average 
citizen is to make it possible for him to win prosperity for himself 
by making himself so useful that others will be glad to pay him 
well for his usefulness ; that is, for his product and his service. 
In the next few chapters we shall consider some of the leading 
forms which this usefulness takes. In other words, we shall 
consider some of the leading types of useful industries and 
occupations. 

The primary industries. As shown in the diagram in the 
preceding chapter, the primary industries are subdivided into two 
classes — the extractive and the genetic. Extractive industries are 
those which merely appropriate natural objects, without any at- 
tempt to replace what is taken or to keep up and increase the 
supply. The genetic industries, which might almost be called 
creative, are those primary industries which make a conscious 
effort to replace that which is taken and to increase the supply. 
Thus, hunting wild animals and grazing domesticated animals on 
wild grass are extractive industries, whereas tillage and stock 
breeding are genetic. Lumbering or cutting timber in a natural 
forest is extractive, whereas forestry, the scientific growing of 
timber, is genetic. 

Hunting. Of all the industries hunting is the most primitive. 
It was sometimes combined with fishing as a means of subsistence. 
It usually included the search for edible fruits, nuts, and vege- 
tables, as well as the killing of animals ; and it sometimes even 
degenerated into a man hunt — that is, the hunting, killing, and 
robbing of men. Where animals constituted the most abundant 

132 



134 ELEMENTARY ECONOMICS 

source of food, primitive men quite naturally hunted animals. 
Where fruits, nuts, and edible roots were abundant it was not 
uncommon for the search for these foods to become the chief 
occupation. The hunting of animals led naturally to domestication 
and herding, and the search for fruits and herbs led quite as 
naturally to horticulture as the next stage in industrial develop- 
ment. Our own primitive ancestors seem to have been hunters, 
and later herdsmen, before they took up agriculture. 

Hunting, which includes trapping, has played an important part, 
and still plays an appreciable part, in our national economy. The 
abundance of game on our Western frontier, when we had a 
frontier, was an important source of food for the advance army 
of settlers. The emigrants who crossed the great plains in the 
early settlement of the mountain states and the Pacific coast also 
benefited to a certain extent from the herds of buffalo, deer, elk, 
and antelope which at one time abounded. More important, how- 
ever, was the regular business of trapping fur-bearing animals and 
of trading with the Indians for the skins and furs which they 
collected. A great deal of the history of our frontier, beginning 
with the first settlements on the Atlantic coast and continuing 
across the continent, has been a history of the fur trade. Many of 
our Western pioneers, guides, and scouts, of whom Kit Carson was 
the most famous, began their careers as hunters and trappers for 
various fur-trading companies. The story of their adventures adds 
a romantic elem.ent to the early history of our Far West, but they 
were making their living by gathering furs to supply the demands 
of commerce. 

Fishing. While hunting, as a source of national wealth, tends 
to decline in importance as the country develops, fishing seems to 
increase. One reason for the decline of hunting is the simple fact 
that land becomes too valuable for other purposes to be allowed to 
remain in its wild state as a refuge or feeding-ground for wild 
animals. W^hen it is turned to other purposes most of those 
animals must of necessity disappear. The same is apparently 
true of the fish in many inland streams which once furnished 
small quantities of this kind of food. But the larger lakes, and 



THE EXTRACTIVE INDUSTRIES 135 

especially the oceans, furnish an almost inexhaustible supply of 
excellent food. As population and the demand for food increase, 
the harvest of the sea assumes a more and more important part 
in our national economy. 

Pasturage. It would be impossible to estimate how much the 
civilized races of the north temperate zone owe to such domestic 
animals as the horse, the ass, the cow, the sheep, the goat, and 
the pig. All these animals have, at one time or another, furnished 
food for man. The horse and the ox have furnished that which 
has played almost as important a part as food in man's conquest 
of nature ; namely, power. Before steam and electricity had been 
harnessed, or water power developed, these animals were almost 
the only sources of power besides human muscles. The skins of 
all were and are still utilized, there being no very good substitute 
for leather even to this day. The cow and the goat have furnished, 
and still furnish, milk — one of our most important articles of diet. 
The wool of the sheep is even now, next to cotton, the most im- 
portant material for the manufacture of clothing. 

In their native state all these animals except the pig lived almost 
exclusively upon grass, either green or dried in the form of hay, 
and they still depend mainly upon it. Even the pig, with his om- 
nivorous appetite and his accommodating stomach, will thrive on 
grass as his chief article of diet, though he needs some more con- 
centrated food in addition if he is to make his best growth. Grass 
and grazing have therefore played a very important part in the 
economic life of that branch of the human race from which we are 
derived. Our ancestors were already herdsmen before they emerged 
from prehistoric darkness. All the animals now under domestica- 
tion and all the fowls except the turkey were domesticated so 
long ago that we have no record as to where or when it occurred. 
It may give us a new respect for those prehistoric ancestors of 
ours when we reflect that we have never succeeded in thoroughly 
domesticating any quadruped since we have had a history, though 
we may soon succeed with the zebra. 

Grazing on our Western frontier. From the earliest settle- 
ments in the territory now occupied by the United States, grazing 



136 ELEMENTARY ECONOMICS 

has been an important industry. Following closely in the wake 
of the hunters, trappers, and fur traders, and in advance of the 
farmers, have gone the herdsmen. The wild grasses furnished a 
ready source of income to the man who possessed animals capable 
of turning them into salable products. The frontier settlements 
in colonial New England possessed large herds of cattle, and down 
to 1820 beef was one of the principal exports. Hogs ran wild in 
the woods, and, living as they did on roots and mast, they fur- 
nished an abundant supply of meat. Horses were exported in con- 
siderable numbers. After the danger from wolves was reduced, 
sheep were grown in large numbers. In Virginia and the Carolinas 
grazing developed even more rapidly. 

Cattle ranching. When the advance waves of settlement 
reached the great prairies of the West the grazing industry entered 
a new phase. Those natural meadows of vast extent furnished 
a much more abundant pasturage than had the great forest 
which had covered the eastern third of the country. On these 
Western prairies — the former home of countless herds of buffalo, 
deer, elk, and antelope, all of which were grazing animals — 
cattle and sheep were very economically produced and would have 
been enormously profitable had not the prices of beef, mutton, 
wool, and hides fallen so low as barely to cover the low cost of 
production. Dwellers in Eastern cities enjoyed abnormally cheap 
meat and continued to do so until the very end of the nineteenth 
century, since which time meat prices have been gradually 
approaching a normal level again. 

Lumbering. Next to grass the most valuable natural product 
of the soil is timber. Though this is sometimes called the age of 
steel, wood is still an important and almost indispensable mate- 
rial. The first settlers on our Atlantic seaboard found a dense 
and apparently limitless forest extending from the coast westward. 
It was not until well into the nineteenth century that the advance 
guard of the army of Western migration began to emerge from this 
forest onto the great prairies of the West. Timber was so abundant 
as scarcely to be considered an economic good. Certainly the 
settlers had little occasion to economize it. The best of it they used 



' 9 


IH 




1 


s 


^H 


\|^^S^^^S^B|^S^3 


H 


1 


E^H 


'* 1 


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ll 


^ 



5 s 



K 



138 ELEMENTARY ECONOMICS 

rather lavishly ; the rest they destroyed in order that they might 
use the land for things which they needed more than they 
needed timber. Along the northern tier of states the great forest 
extended as far west as Minnesota. In the middle strip the prairies 
began in parts of northern Indiana. Farther south the forest fol- 
lowed the Ohio valley to the Mississippi and extended beyond 
through central and southern Missouri, Arkansas, and Louisiana 
into portions of eastern Kansas, Oklahoma, and Texas. Other 
forests were found in the high mountains of the West, but the 
finest of all were found in the region of Puget Sound in our extreme 
Northwest. 

After the first onslaught of the settlers, who were, bent on get- 
ting rid of the timber in order to clear the land for cultivation, 
lumbering became a regular business in every part of our forested 
area. Its greatest development was in lands which were not the 
most valuable for agricultural purposes. Along our northern 
border, where the climate was somewhat severe and where the soil 
was rather light and sandy, the timber was not destroyed in order 
to clear the land, because better lands were available farther 
south. When the timber of this northern strip came to have a 
commercial value it became the scene of lumbering on a large 
scale. Large companies were formed, thousands of men were em- 
ployed, and great fortunes were made. Lumbering in this region, 
particularly along the Great Lakes and the upper tributaries of 
the Mississippi River, where water transportation was cheap, 
developed rapidly during the latter half of the nineteenth century 
and then declined rapidly. 

A similar development took place in the Southern states. Here 
the greatest activity was along the southern coast, just outside of 
the Cotton Belt ; that is, on land which was not cleared primarily 
for the purpose of growing cotton, but where the timber was left 
standing until it had acquired a commercial value through the 
increased demand and the improvement of transportation facil- 
ities. The most valuable timber tree of this belt was the yellow 
pine, as the white pine had been of the northern belt. 



140 ELEMENTARY ECONOMICS 

The greater part of our original virgin forest has now been de- 
stroyed. Such cut-over lands as are not suitable for other purposes, 
or are not needed immediately for agriculture, will undoubtedly 
be allowed to reforest themselves or be reforested by scientific 
methods, but it is safe to say that the days of cheap and abundant 
timber in this country are passed. From this time forward careful 
conservation will be necessary in order to safeguard an adequate 
supply. 

Mining. The greatest of all our extractive industries is mining. 
Within the boundaries of the United States are found a wealth and 
variety of minerals such as no other country is known to possess, 
though no one knows what new discoveries may yet be made in 
this and other lands. 

Notable among our mineral products are the following. The 
values given are for the year 191 7. 

P , J Bituminous $1,249,272,837 

l^ Anthracite 283,650,723 

/ Ore 238,260,444 

1,053,785,975 

Copper 514,911,000 

Petroleum 522,635,213 

Natural gas . . . . , '. . . . . 140,000,000 1 

Gold 83,750,700 

Silver, lead, zinc, aluminum, cement, building stone, lime, and 
salt are also valuable products, besides many others of less value. 
Our total mineral production for the year 191 5 aggregated more 
than two and a third billions of dollars. 

Since minerals are not reproduced or replaced when once ex- 
tracted from the earth, it is only a question of time before all of 
our rich deposits will be exhausted. In some cases the deposits 
are so enormous as to remove the time of their exhaustion far 
into the future, so far that it is difficult for us to realize that it is 
coming. Authorities agree that our coal deposits will last for 
many hundreds! of years, some say many thousands of years. If, 
however, we have enough coal to last, let us say, for only a 
thousand years, it is a difficult question to decide to what extent 



^™npig 



142 ELEMENTARY ECONOMICS 

that should give us concern for the future welfare of our country. 
With the progress of invention we may find other sources of heat 
and power before our coal is gone. Probably our best policy is 
merely to avoid unreasonable waste or destruction of mineral 
resources and then leave future generations to work out their own 
problems. 

Instability of the extractive industries. All our extractive in- 
dustries have not only added greatly to our material wealth, they 
have likewise given rise to picturesque but somewhat unstable 
phases of our social life. The early hunters and trappers were a 
hardy, adventurous race, whose deeds and prowess have become a 
part of our national history. Our herdsmen likewise, especially 
those who developed the cattle business on the Great Plains, 
supplied an element of romance and adventure which still appeals 
to the imagination of our young people. Our hardy fishermen and 
whalers have given splendid examples of the courage and strenuos- 
ity which can wrest a living from the unconquerable ocean. Our 
lumber camps and our mining camps have drawn adventurous 
characters from the ends of the earth and furnished much excellent 
material for the story- writers. But instability is a characteristic 
of these industries and consequently of the life which grew up 
around them. Stability can be supplied to our national life only 
by industries which are themselves self-perpetuating. The genetic 
industries must supply that need. 

EXERCISES 

1. What are the extractive industries, and why are they so called? 

2. What part has hunting played in our national history? 

3. What part has fishing played? 

4. What is the most valuable natural or wild product of our soil? 

5. What part has grazing played in our national history? 

6. In what sections of this country did lumbering develop on the 
largest scale? 

7. Which is the greatest of our extractive industries? 

8. Is it likely that a stable civilization can be built up on the extrac- 
tive industries alone? 



CHAPTER XVII 

THE GENETIC INDUSTRIES 

What are the genetic industries? By the genetic indus- 
tries are meant those in which men make conscious and systematic 
efforts to direct the biological processes of reproduction so as to 
increase the supply of desirable plants and animals. The greatest 




of these is agriculture, though forestry and fish culture are also 
included. Agriculture, however, is sometimes carried on in such 
a slipshod manner as scarcely to deserve to be classed as a 
genetic industry. A genuinely genetic type of agriculture can 
endure and even improve for indefinite periods of time on the same 
soil ; that is, it not only preserves but improves the fertility of 
the soil, generation after generation, for hundreds and thousands 
of years. It thus makes possible a stable, an enduring, and an 
expanding civilization, such as could not be supported exclusively 
by any of the extractive industries. 

Demand of all outdoor industries for space. All of those in- 
dustries which appropriate or increase the products of the soil, 
such as hunting, grazing, lumbering, forestry, and farming, have 

143 



144 ELEMENTARY ECONOMICS 

one characteristic in common. They all require a great deal of 
space as compared with mining and the secondary industries, such 
as manufacturing and merchandising. So great is this demand 
for space on the part of those industries which gather in or develop 
the products of the soil that it is impossible to house them, and 
they are of necessity outdoor industries. Moreover, those who 
engage in them must of necessity spread themselves over wide 
areas. They are compelled by the nature of their industries to 
live in scattered homes or in small villages located far apart. 
Living so far apart, with plenty of room, in close contact with 
nature but in little contact with other men because of the distances 
between them, produces a profound reaction upon their lives and 
characters. It is sometimes difficult for indoor and outdoor people 
to understand one another. 

' Stages in the economy of land. We have seen in the last chap- 
ter that the utilization of the soil, not only on our own frontier 
but also in the development of civilized life among our remote 
ancestors, passed through several distinct stages, such as the 
hunting stage, the grazing stage, and the agricultural stage. These 
are progressive stages in the economizing of land. It takes a great 
deal more land to support a given population by hunting than by 
grazing, and by grazing than by agriculture. When game grew 
scarce, or when population increased, those who had the wisdom to 
make the change were forced into grazing and then into tillage, in 
order to increase their means of subsistence. That hunting was 
an uneconomical use of land may be inferred from the fact that 
there were never, according to the best authorities, more than one 
million Indians within the boundaries of the present United States. 
This territory now supports approximately a hundred times that 
number of people and supports them more comfortably tHan the 
Indians were supported. It is primarily through tillage that this 
territory is now made to yield so much more subsistence. 

Tillage. Tillage consists essentially of three processes: first, 
preparing a good seed bed, in which plants can grow more 
vigorously than in natural, or unprepared, soil ; second, planting 
in this bed the seeds of such plants as are deemed more useful or 




© Underwood & Underwood, N.Y. 

A BEAUTIFUL BRIDGE AND A HUGE IRRIGATION DAM COMBINED 

By means of this dam across the Upper Rio Grande in New Mexico, water 
will be stored for the irrigation of thousands of acres of dry land 



146 ELEMENTARY ECONOMICS 

desirable ; and, third, destroying all other plants, commonly called 
weeds, which may start to grow in competition with the plants 
whose seeds were planted. 

The law of diminishing returns. It is possible, however, to 
carry tillage so far as to produce undesirable results, or to try to 
grow so much per acre as to reduce the product per man.* It is this 
phase of the question of economy that is commonly known as the 
law of diminishing returns from land. This law is simply that, 
after a certain amount of labor with the appropriate tools has 
been applied to the cultivation of a given crop on a given piece of 
land, further applications; of labor to the same land do not yield 
proportional returns. They may increase the crops slightly, thus 
increasing the yield per acre, but they will not increase the crop 
in proportion as the labor is increased. The result is a decrease 
in proportion to the number of units of labor. 

The great law of productivity. This law of diminishing re- 
turns has been called the great law of agricultural production. It 
is a part of a wider law, which may be called the law of variable 
proportions^ and which is the fundamental law of all production. 
For the present it is sufficient to point out that it presents the prob- 
lem of balancing the different factors which have to be combined 
in~production. It is much the same problem at bottom, whether 
it be the balancing of the different elements of plant food in fer- 
tilizers or of the different elements of animal food in the feeding of 
cattle, the balancing of such factors as labor, land, and capital in 
running a farm or a factory, or the balancing of the different kinds 
of people that make up a nation. 

The largest industry. Agriculture is not merely one of the 
basic, or primary, industries ; it is the most important of all 
industries, if we consider the world at large or any large section 
of it which is compelled to live within itself. Considerable sec- 
tions of country and considerable masses of population may live 
primarily by the indoor industries, sending out their surplus prod- 
uce to distant lands and bringing back in exchange the products 
of the soil. Thus, a country like England, or considerable portions 

1 For a fuller discussion see chapter on the Law of Variable Proportions. 



148 ELEMENTARY ECONOMICS 

of our own country, such as southern New England, may become 
largely urbanized ; that is to say, the greater portion of the 
people may engage in indoor rather than in outdoor industries. 
But they live by selling the products of their indoor industries to 
people far beyond their own boundaries and bringing in from the 
ends of the earth the products of the soil. 

The United States as a whole is tending to become an ur- 
banized nation; that is, it is tending toward a condition where 
more than half of its people will work indoors rather than out- 
doors. Again, there is a tendency in the world at large for 
the indoor industries to gain somewhat in importance as com- 
pared with the outdoor industries, though it is unlikely that the 
former will ever actually overtake the latter. 

Why agriculture is losing ground. As civilization advances, 
people tend to demand finer and finer products for consumption. 
Usually, though not in every case, producing a finer product 
means doing more work in the final, or finishing, stages. It takes 
no more wool or cotton, and therefore it takes no more agricul- 
tural labor, to make fine than coarse clothing. The difference is 
mainly in the amount of work which is put upon the material 
after it leaves the farm. In other words, of the total work put 
upon material for fine clothes, a smaller proportion than for 
coarse clothes is outdoor labor and a larger proportion is indoor 
labor. The same principle applies to shoes, furniture, vehicles, 
and many articles of food. 

Another and more important fact is the increased use of agri- 
cultural machinery. Fewer men are now needed in the actual 
cultivation' of the land, as some of the work is done in the fac- 
tories where farm machinery is made. Whereas all the men who 
formerly helped in the harvesting of a wheat crop actually worked 
in the field, now some of them work in the shops and factories 
making harvesting machinery. The same change has taken place 
with respect to many other kinds of farm work. 

Influence of occupation on character. There is one leading in- 
dustry in which success depends primarily upon the ability to 
deal efficiently with nature and natural forces ; that is, farming. 




A LARGE DAIRY FARM IN CALIFORNIA 

Milk is the most economical animal food known. A good dairy cow will 
provide more food in a year than a beef animal will produce in three years 



150 ELEMENTARY ECONOMICS 

In most of the others success depends quite as much on ability to 
deal with other men as on ability to deal with nature. They who 
get their living out of the soil must know the soil, the weather, 
the times and seasons, and everything that will affect their suc- 
cess, whereas they who get their living by dealing with other men 
must know the ways of men. 

Commercial agriculture. Self-sufficing agriculture has become 
a thing of the past, and we are developing what may be called 
commercial agriculture ; that is, a system of agriculture in which 
the farmer is a buyer and seller, a dealer with other men, to almost 
the same extent as a city business man. He must now understand 
not only markets but political and social conditions. This is 
tending to diminish the differences between the dwellers in the 
city and the dwellers in the country. 

The independence and dependence of the farmer. We are 
hearing constantly reiterated, especially by advocates of the back- 
to-the-land movement, that the farmer is the most independent 
person in the world. Probably no one is so dependent upon out- 
ward physical conditions as the farmer. He must continually watch 
the weather and guard against pests of all sorts, animal diseases, 
and even town marauders. Every year lightning, hail, wind, and 
floods destroy crops in some part of the country. On the other 
hand, the indoor worker is constantly harassed by troubles of 
human origin, such as political elections, commercial crises, 
changes of fashion, the organization of dangerous trusts and 
monopolies, labor troubles, and advertisers. 

One important characteristic of agricultural industry is its de- 
pendence upon the seasons. The indoor worker is frequently able 
to continue uninterruptedly in one kind of work, week after week, 
month after month, and year after year. From the very nature 
of the case this is impossible in agriculture, for every crop has 
its growing-season and its time of harvest. On every farm almost 
every hour of the day has its own special work to be done, so 
that work is continually changing, not simply from season to 
season, from month to month, and from week to week, but even 
from hour to hour. 



152 ELEMENTARY ECONOMICS 

Country people generally self-employed. Perhaps the most im- 
portant fact concerning agriculture is that a very large proportion 
of those engaged in it are self-employed, whereas the vast majority 
of those who live in cities are employed by other people. The fact 
that farming is an industry of small units, while indoor industries 
are generally industries of large units, produces this difference. 

Some of the deepest students of political and social tendencies 
have come to doubt whether democracy can ever develop to a 
high stage of efficiency except among people who are in the main 
self-employed. It is true that modern democracy arose first in 
the cities and towns, but it is likewise true that at that time the 
cities and towns were the homes of self-employed men. Before 
the rise of the factory system such manufacturing as was done 
was carried on in small shops by craftsmen who were in the ma- 
jority of cases self-employed. The rural districts, however, were 
under the feudal system. 

Conditions are exactly reversed at the present time. Under the 
factory system the great majority of people in the indoor indus- 
tries work under bosses. Since the break-up of the feudal system 
and the rise of the one-family farm, which is the characteristic 
farm in this country, the average dweller in the country is his own 
boss. This may have something to do with the fact that city 
politics is run by bosses and country politics is not. 

Interdependence of the sexes. The division of labor between 
the sexes is much more marked, of course, in agriculture than in 
indoor industries. There are many operations on every farm 
which require the superior muscularity of the male. This makes 
it difficult for women to compete with men in general farm work. 
At the same time, the fact that the farms are so far apart makes 
it impossible for these muscular males to get along without women 
to run their houses. The men cannot live in boarding houses, 
because that would make it necessary to live too far from work. 
Consequently one finds in our rural districts fewer old, unmarried 
males than one finds infesting our cities and towns. Moreover, 
there are comparatively few opportunities for a woman to make an 
independent living in the country. 



THE GENETIC INDUSTRIES 153 

Forestry. Forestry as distinct from lumbering has only re- 
cently received attention in this country. In order to be an 
economic success, forestry must obviously be practiced on land 
which would produce a greater value at lower cost when planted 
to trees than when planted to anything else. Mountainous and 
semimountainous lands, stony or swampy lands, and lands which 
for other reasons are unsuited to tillage or pasturage furnish the 
natural opportunity for the practice of forestry on a large scale. 
While the annual product in the form of the annual timber growth 
is small, the cost is likewise small. Since such land would other- 
wise go to waste altogether, it is better to get even a small product 
than none at all. 

Scientific forestry. In recent years the federal government and 
several of the states have created forest reserves. Scientific 
forestry is being practiced, but it must be remembered that scien- 
tific forestry in this country is necessarily different from what it 
is in old countries. In a country where lumber is still cheap, as 
compared with other countries, and where labor is dear as it is 
in this country, one cannot do in the name of science what one can 
do in an old country, where lumber is dear and labor cheap. 
A serious problem for the American forester is to keep costs down ; 
unless he does this he may find that the timber is not worth what 
it costs to grow it. For this reason it is not the custom in this 
country to do much planting of trees or preparation of the ground. 
The work is mainly confined, first, to cutting out undesirable 
growths (in order to give the more desirable trees, which are in the 
main self-seeded, a chance to grow) and, second, and more im- 
portant still, to guarding against forest fires. Our summers, which 
are dry compared with those of Europe, make the forest fire the 
great enemy of the American forester. The fight against diseases 
and pests is a third task. 

Fish culture. Fish culture has been fostered by the federal 
and state governments of the United States and by various private 
agencies. Spawn is collected and hatched, and millions of young 
fish are distributed in our streams and along our seacoasts. 
A great deal of study is being given to the habits of various edible 




bO 

I 



156 ELEMENTARY ECONOMICS 

fishes and the sources of their food. Private enterprise is also 
active in stocking streams and small bodies of water and in grow- 
ing fish of various kinds for the market. 

With our Great Lakes on the north, the ocean on the east and 
the west, and the Gulf of Mexico on the south, and with all our 
noble rivers, we have access to such vast and seemingly inex- 
haustible supplies of fish that fish culture in a strict sense has not 
developed very far among us. Hatching and distributing spawn, 
and leaving the spawn to shift for itself and take its chances along 
with other wild fish, is a step in the right direction, but it stops 
far short of the work of the animal breeders on our farms. 

Summary. Our particular branch of the human race has been, 
for many generations, a pioneering and colonizing race. It has 
been spreading over new and sparsely occupied areas, in which 
natural resources, such as virgin forests, mineral deposits, wild 
g^me and fish, and excellent grass for pasturage, have abounded. 
A considerable part of its living has been derived from the mere 
appropriation of these natural resources. When the time comes, 
as in the natural order of things it soon must, when there are no 
more new and sparsely occupied lands to colonize, the extractive 
industries must decline in importance as a part of our national 
economy. Then we must depend more and more upon the genetic 
industries for subsistence and for raw materials. This growing 
importance will justify our giving more and more attention to 
these industries. 

EXERCISES 

1. What are the genetic industries? 

2. Why are genetic industries generally outdoor industries? 

3. How do the outdoor industries affect the lives of the workers 
as compared with the way in which the indoor industries affect them ? 

4. What are the leading stages in the progressive economy of land ? 

5. What is tillage ? 

6. What is the law of diminishing returns ? 

7. What is the law of variable proportions ? 

8. How does agriculture compare in size with other industries (i) in 
the world at large? (2) in your part of the world? 



158 ELEMENTARY ECONOMICS 

9. Is agriculture gaining or losing ground as compared with the 
indoor industries ? Why ? 

10. What is meant by commercial agriculture? 

11. Why are politics generally in a better condition in country than 
in city communities ? 

12. Are women more independent or less independent in the country 
than in the city ? Why ? 

13. Why is scientific forestry in this country different from scientific 
forestry as practiced in older countries ? 

14. How is fish culture carried on in the United States? 



CHAPTER XVIII 
THE MANUFACTURING INDUSTRIES 

Various types of manufacturing establishments. One kind 
of manufacturing establishment which is still numerous and 
widely distributed is the small shop where the worker owns his 
own tools and equipment, buys his own raw materials, and sells 
the finished product. It does not constitute much of a change, 
certainly not a revolution, when he hires a few helpers or appren- 
tices to assist him. They work with his tools upon his raw 
materials, and they receive their compensation in the form of 
wages instead of in the form of a share of the profits of the busi- 
ness. Even where the owner ceases to do any of the work except 
to keep the accounts, buy the raw materials and sell the products, 
and exercise general supervision and management, the transition 
may have been so gradual as to attract no one's attention. By 
this gradual change, however, a type of manufactory may be 
developed which is very different from that with which manufac- 
turing began. 

But the transition is not always made in this way. Other 
methods of organization have existed at various times and still 
exist. In one class of shops the worker owns his own tools and 
runs his own shop, but does not own the raw materials upon which 
he works. These are furnished by an outside person who supplies 
them and owns the finished product, paying the worker a price 
agreed upon for the work which he does. In this case also the 
worker may hire a few helpers or apprentices. 

Still another method is found, where the worker owns neither 
the materials upon which, nor the tools with which, he works. 
A third person supplies both materials and tools, — everything, in 
fact, except the place in which the work is done, which place 
the laborer himself supplies. 

IS9 




=1 



eJ o 



So 



o o 



73 c3 






i62 ELEMENTARY ECONOMICS 

In the modern factory, however, everything is assembled in 
one building or group of buildings, around one power plant ; every- 
thing is owned by one group of individuals, and the laborer 
furnishes nothing except his own skill and strength. The great 
advantage of this system is its economical use of power. Wherever 
a large use of power is necessary, it is important that it be effec- 
tively and economically utilized. In all such cases the modern 
factory tends to displace all other methods of manufacturing. 
Where comparatively little power is required, and where, there- 
fore, it is not of such great importance that power be economized, 
other methods still survive. In some cases, however, the com- 
petition of the factory is so severe as to force the workers in 
the small shops to work for very low wages. Where the main 
factor in success is the skill of the worker rather than cheap 
power, the small shop will probably continue to compete success- 
fully with the large factory, but where cheap power is the main 
factor, the large factory will probably drive out the small shop. 

Tendency toward large-scale production. The stages of this 
development from the very small shop to the factory are by no 
means clear. Almost every form of manufacturing will be found 
in every stage of economic development. The large factory has 
come to be the dominant form only since the invention of power- 
driven machinery. The Industrial Revolution, as it is called, was 
the rather sudden growth of the factory to this dominant position 
during the latter half of the eighteenth century. 

Power-driven machinery and large-scale production. A re- 
markable series of inventions followed one another in rapid suc- 
cession and transformed several of the large industries of England 
into factory industries. These changes put England definitely in 
the lead as a manufacturing nation. The same revolution came in 
other countries a little later. 

Says Marshall^: 

The quarter of a century beginning with 1760 saw improvements 
follow one another in manufacture even more rapidly than in agricul- 
ture. During that period the transport of heavy goods was cheapened 

1 Alfred Marshall, Principles of Economics (4th ed.), p. 42. London, 1898. 




I Underwood & Underwood,, N.Y. 

ROLLING MILL AT WORK 




SPINNING BY HAND, ALMOST A LOST ART 




A SPINNING-ROOM IN A MODERN COTTON MILL 



1 66 ELEMENTARY ECONOMICS 

by Brindley's canals, the production of power by Watt's steam engine, 
and that of iron by Cort's processes of puddling and rolling and by 
Roebuck's method of smelting it by coal in lieu of the charcoal that 
had become scarce ; Hargreaves, Crompton, Arkwright, Cartwright, and 
others invented, or at least made economically serviceable, the spinning 
jenny, the mule, the carding machine, and the power loom ; Wedg- 
wood gave a great impetus to the pottery trade that was already 
growing rapidly ; and there were important inventions in printing from 
cylinders, in bleaching by chemical agents, and in other processes. A cot- 
ton factory was for the first time driven directly by steam power in 
1785, the last year of the period. The beginning of the nineteenth 
century saw steamships and steam printing presses, and the use of gas 
for lighting towns. Railway locomotives, telegraphy, and photography 
came a little later. Our own age has seen numberless improvements 
and new economies in production, prominent among which are 
those relating to the production of steel, the telephone, the electric 
light, and the gas engine ; and the social changes arising from material 
progress are in some respects more rapid than ever. But the ground- 
work of the changes that have happened since 1785 was chiefly laid 
in the inventions of the years 1760 to 1785. 

Decay of small industries. Scarcely less striking would be an 
account of the rise of machine production in other industries, fol- 
lowing the use of steam power and cheap iron and steel. Shoe 
manufacturing, the grinding of flour, the slaughtering of meat ani- 
mals and the curing and packing of meat, the manufacture of 
watches, automobiles, etc., and various other industries have shown 
the same tendency 'toward the factory system af production. 
Regarding changes in our own country Professor Ely writes^: 

Let the reader call to mind the many things in our economic life 
which the world never saw before. He will, of course, think at once 
of the railway and of steam navigation, and of other applications of 
steam to industry. But these have brought other important new 
phenomena. The concentration of large masses of working-people in 
great factories of which they own no part, and under a single 
employer, such as we see daily, is something new for skilled mechan- 
ics ; not that nothing of the kind ever existed before, but its existence 
is so much more common and affects so many more people that in its 

1 Richard T. Ely, An Introduction to Political Economy, pp. 55-57- New 
York, Chautauqua Press, 1889. 



THE MANUFACTURING INDUSTRIES 167 

social aspects it is new. In the last century, and in previous centuries 
of the Middle Ages, artisans owned the tools which they used, and 
after they had fully mastered their trades usually called no man 
master, but worked in their own little shops. Even within the memory 
of the author, still comparatively a young man, this condition of things 
has become less common. The smith, under the spreading tree, of 
whom Longfellow sang, is disappearing. He has left the crossroads 
in the little village and now works in a machine shop. His friends, 
the carpenter and the shoemaker, have accompanied him. A few 
artisans may stay to do repairing and other small work, but the cheaper 
processes of vast establishments have rendered this migration inevitable 
for the many. Only the few among artisans can live in the old style. 

Tendency of mechanically expert nations toward indoor 
industries. Large portions of the world's population still remain 
in a condition of mechanical inexpertness. They find it more 
advantageous to live from the products of the soil, exchanging 
these products for the manufactured products of the mechanically 
expert. Other populations, like those of our own West, while 
mechanically expert, occupy land of such abundance and fer- 
tility as to enable them to prosper more by cultivating land 
than by turning to indoor industries. They use their mechanical 
expertness in contriving and operating farm machinery. They ex- 
change their large surplus of farm products for the manufactured 
products of other people who are also mechanically expert and 
who occupy lands of less extent and lower fertility. The latter, 
not having vast areas to cultivate, find less profitable opportu- 
nities for their mechanical expertness out of doors than indoors. 
Therefore they develop the indoor industries. England, which got 
a good start ahead of the rest of the world in this line of develop- 
ment, prospered amazingly. The eastern part of the United States, 
together with France, Belgium, Holland, and lately, Germany, has 
been following in the same direction. 

Taking the United States as a whole, it is rapidly ceasing to be 
primarily an agricultural country and is becoming a manufacturing 
country, following a similar development in England and north- 
western Europe. Canada, South America, Australia, South Africa, 
and all countries where white men colonize will doubtless follow 



1 68 ELEMENTARY ECONOMICS 

in the same direction. There will then be left only the tropics in 
which to sell the surplus products of manufacture and from which 
to draw the surplus products of the soil. It is probable that the 
development of the indoor industries will be checked before that 
state is reached. In that case each country will have to preserve 
a balance, or equilibrium, between the indoor and the outdoor 
industries. 

Why more work has to be done indoors. As pointed out in 
the chapter on the Genetic Industries, the advance in civilization 
and the general improvement of living conditions tend to add to 
the relative importance of the indoor as compared with the out- 
door industries. The finer the goods we demand, the more work 
we make, generally speaking, for the indoor workers. Even farm 
work itself comes, in a sense, to be done indoors rather than out- 
doors. The substitution of the tractor for the horse may serve to 
illustrate this statement. The raising of horses is outdoor work ; 
the manufacturing of tractors is indoor work. If we use more 
tractors and fewer horses a larger proportion of our workers 
will work indoors and a smaller proportion outdoors. 

This is a process which must be expected to continue even 
though we remain a self-sufficing nation. If, ceasing to be a 
self-sufficing nation, we bring raw materials and products of the 
soil from distant portions of the earth and send in exchange 
the more refined products of the indoor industries, we must expect 
that manufacturing will become in larger and larger degree our 
dominant occupation. This will bring in its train many conse- 
quences of a very perplexing nature. Our people will more and 
more take on the characteristics of an indoor people. 

Dependence of manufacturing upon transportation. Another 
most important consequence of the development of manufacturing 
as our dominant industry will be the growing importance of trans- 
portation. If we are to' turn to the indoor industries and depend 
upon distant regions of the earth for the products of the outdoor 
industries, obviously we must find cheap and efficient methods of 
sending our products to those distant regions and of bringing their 
products back. 



THE MANUFACTURING INDUSTRIES 169 

EXERCISES 

1. What kind of a picture do you have in your mind when you 
think of a factory ? Is this the only kind of factory ? What are some 
of the other kinds ? 

2. What are the main reasons why large factories have tended to 
displace small shops ? Do these reasons apply to each and every 
kind of manufacturing? 

3. Why do some nations develop indoor industries more rapidly than 
others ? 

4. Why does more and more work tend to be done indoors rather 
than outdoors? 



CHAPTER XIX 
TRANSPORTATION 

Moving things over long distances. Since all industry con- 
sists in moving materials from one place to another, it follows as 
a matter of course that transportation must form an important part 
of the industrial system. The transportation system has been 
likened to the veins and arteries of the human body, just as the 
telegraph and telephone systems have been likened to the nerves. 

Interdependence of manufacturing and transportation. The 
development of the factory system as described in the preceding 
chapter, and of large-scale production in general, would have been 
impossible without cheap transportation. 

The railway and the factory have gone hand in hand in their develop- 
ment and in their economic results. With the means of transportation 
which existed two hundred years ago large industries would have been 
impossible. The substitution of turnpikes for common roads, of canals 
for turnpikes, and of railways for canals was as essential a part of 
industrial progress as was the development of the factory system.^ 

Without a wide market on which to sell its large product a large 
factory or manufacturing establishment would be an impossibility. 
In the days of restricted local markets, when each little com- 
munity was almost self-sufficing, small shops having individual 
handicraftsmen could supply the needs of each such market. Not 
the least important of the changes which have come about since 
the middle of the eighteenth century have been the removal of the 
barriers which divided one restricted market from another and 
the creation of nation-wide or world-wide markets, instead of a 
series of local, restricted markets. 

1 President A. T. Hadley, Transportation, in Palgrave's " Dictionary of 
Political Economy." 

170 



TRANSPORTATION 1 7 1 

The widening of the market. Cheap transportation, more 
than anything else, has made possible the development of nation- 
wide and world-wide markets. Raw materials sometimes have 
to be brought long distances, especially in a case where several 
different kinds of raw material enter into the making of a given 
product. These different kinds of raw material are not always 
found in the same neighborhood. The iron ore of the Lake 
Superior region would be practically useless, because of its distance 
from the coal fields, were it not for cheap transportation on the 
Great Lakes, by means of which it can be carried almost to 
the mouths of the coal mines of Illinois, Indiana, Ohio, and 
Pennsylvania. 

In other cases the raw material itself is produced over such 
wide areas as to make centralized and large-scale production an 
impossibility without cheap transportation. The slaughtering of 
meat animals and the curing and packing of the meat is a case in 
point. These animals must be grown on the farms and ranges which 
cover considerable areas. Without cheap transportation they would 
have to be slaughtered and consumed nearer the sources of produc- 
tion ; with cheap transportation they may be sent to a few large 
packing centers, and from these centers the meat can be distributed 
over practically the whole country and over considerable portions 
of the civilized world. Without cheap transportation every large 
city would be dependent upon the supply of meat that could be 
grown within driving distance ; that is, within such distances as 
the animals could travel on foot. They would have to be slaugh- 
tered near each center of consumption in order that the meat 
might be distributed economically. 

However great the economies of large-scale production may be, 
if the cost of transportation were as great as it once was the small 
producer, using locally produced raw materials and. selling on a 
local market, would save so much on the cost of transportation as 
to give him an advantage over the largest factory located a long 
distance away. 

Water transportation developed first. Historically, water 
transportation was cheapened long before we had cheap land 



172 ELEMENTARY ECONOMICS 

transportation. Consequently we find that commerce in a large 
sense developed first on the water. Great cities were located where 
there were advantages in water transportation. Some considerable 
cities, however, developed along overland routes. Damascus and 
Palmyra in western Asia, Troyes and Nuremberg in Europe, may 
be cited as examples. But most of the great cities developed along 
water routes ; Canton, Hankow, Calcutta, Delhi, Nineveh, Baby- 
lon, Bagdad, Tyre, Constantinople, Memphis, Alexandria, Venice, 
Genoa, Antwerp, and London may be cited as examples. 

Water transportation developed first, of course, where it was 
safe ; that is, on rivers or small bodies of inclosed water. The 
great rivers were the first great routes for cheap transportation. 
The valleys of the Nile, the Euphrates, the Tigris, the Ganges, 
and the Yangtze developed great civilizations, partly because they 
contained good soil and opportunities for irrigation but also be- 
cause they furnished means of transportation. 

The keel and the compass. The next stage was reached when 
the sailors ventured beyond the mouths of the rivers along the 
adjacent coasts and in inclosed seas like the ^Egean, the Mediter- 
ranean, and the Baltic. The difficulty of navigation in those days 
was such as to make an ocean voyage extremely hazardous, if at 
all possible. The boats of the earliest days were flat-bottomed — 
that is, they had no keels ; it was therefore impossible to sail in 
the teeth of the .wind. Sails could be used only when the wind 
was favorable; that is, when it blew almost in the direction in 
which the sailors wanted to go. At other times they had to depend 
upon large numbers of oars worked by human muscles. The galley 
slave was a part of that system of transportation. With the keel 
boat and the mariner's compass the use of sails was greatly 
enlarged, and sailors could venture out on the open ocean. 

The world faces the ocean. As a result of the discoveries of 
Columbus, Vasco da Gama, and others, the world is said to have 
faced about. The various nations had formerly faced inward, 
with their backs to the ocean ; the land united peoples, but the 
ocean divided them. Since that time they have tended to face 
outward — that is, to face the ocean; and it is now said that the 



TRANSPORTATION 



173 



land divides, but the ocean unites. While distances are great over 
these ocean routes, the building of larger ships propelled either 
by steam or by wind has made ocean transportation the cheapest 
of all forms. Where time is not a factor the huge sailing vessels 
can carry freight thousands of miles at a lower cost than it can be 
carried hundreds of miles even on our best railways. Where time 




THESE CHINESE PORTERS CARRY ENORMOUS LOADS ON RACKS 
WHICH ENABLE THEM TO REST WITHOUT UNLOADING 



is a factor the ocean cost is slightly greater, but still ocean freight 
rates are amazingly low. The question of economizing power and 
that of economizing time seem sometimes to come into conflict. 
The sailing vessel is the greatest economizer of power, but it is 
not economical of time. 

Land transportation. The most primitive trade routes were 
probably paths traversed by human beings carrying their own 
loads. Beasts of burden were, however, utilized very early for 



174 ELEMENTARY ECONOMICS 

this purpose. The accounts of early explorers in Central Africa 
describe the great forest as penetrated by a network of paths run- 
ning from one village to another, so that a traveler could cross the 
continent by persistently following these paths. The great cara- 
van routes across the desert and open country made use of animals 
as beasts of burden. 

Wheels. A wheeled vehicle is a great advance over the carrying 
of loads on the backs either of men or of animals. In some of the 
backward districts of China porters still carry huge loads, and it 
is amazing what loads a man can carry who has been trained to it 
all his life. But where the road is made suitable for wheeled ve- 
hicles the porter can haul about three times as much on wheels as 
he can carry. On a paved street or a macadamized road in this 
country a pair of good horses will haul from two to four tons, 
whereas about six hundred pounds is a load for one pack horse. 
Even on the common dirt roads of the country, when they are 
reasonably well kept and not muddy, a pair of horses will haul 
from a ton and a half to two tons. 

Tracks. It is interesting to note how every advance in methods 
of transportation seems to depend upon the quality of the road or 
track. Wheeled vehicles could be substituted for packsaddles 
only when there were roads suitable for wheeled vehicles. Well- 
kept roads and paved streets are necessary before mechanical 
power can be substituted for animal power in ordinary hauling. 
The acme of track building is the railway, where the wheeled 
vehicle runs on steel rails. The friction and loss of power between 
the wheel and the track is reduced to the minimum. In a similar 
way the modern locomotive is the climax of the development of 
mechanical power. The powerful engines of today, however, could 
scarcely run on the old-fashioned railway track, with its light iron 
rails. Improvement in the manufacture of the steel rail has had to 
go hand in hand with the improvement of the locomotive engine. 

Railways. In no country has the development of the railway 
quite kept pace with its development in the United States, though 
in proportion to their need for railway transportation England and 
France have kept close behind us. In addition we have had an 



176 ELEMENTARY ECONOMICS 

abundance of material for railway construction. Moreover, our 
people have shown a great deal of initiative and enterprise in push- 
ing the business. In some countries this spirit of enterprise has 
been so lacking that the governments themselves have had to take 
hold of the matter and build the roads at government expense. 

Public or private railways. The problem of railway manage- 
ment, however, has been a very difficult one in every country. In 
one sense the railway system would seem to belong to the general 
system of streets, roads, and highways. The general experience 
of mankind has shown that streets, roads, and highways should 
be public rather than private. This has led to the assumption 
that railways should be treated similarly. There is, however, this 
important difference. On the streets, roads, and highways private 
individuals use their own vehicles, travel freely, and go and come 
when they please. The actual work of transportation, therefore, 
is not carried on by the public. This method would be impossible 
on a railway. The trains must run on schedule time and under a 
well-administered system ; otherwise there would be nothing but 
confusion and inefficiency and multitudinous wrecks. If the public 
undertakes to own the railways it would have to go much farther 
than it does when it owns the streets and highways. It would either 
have to operate all the vehicles (that is, trains) or lease the road to 
a single company which would have the exclusive use of the tracks. 

There are therefore two analogies which may be drawn between 
the highway system and the railway system. Since the government 
owns the highways, one group of people, reasoning by analogy, say 
that the government ought to own the railways. On the other 
hand, it is asserted that since private individuals operate the 
vehicles that are used on the highways, and the government is not 
in the transportation business at all, a similar rule should prevail 
with respect to railway transportation ; private individuals or 
companies should do the hauling and therefore own the railway. 
In this country we have followed the latter principle, but it has 
made necessary a considerable regulation of the companies which 
do the hauling. A third possibility is for the government to build 
and own the tracks and then lease them to operating companies. 



178 ELEMENTARY ECONOMICS 

Monopolistic character of a railway. From the very nature 
of the case a railway must be operated as a monopoly or quasi 
monopoly. It would be impossible for even two companies to run 
trains on the same track or over the same railway system unless 
one became absolutely subject to the administrative rules of the 
other. This quasi-monopolistic character of the railway has given 
the management more control over rates than individual draymen, 
freighters, cabmen, etc. can exercise over freight and passenger 
rates in the vehicles that are operated on public highways. In 
order to hold in check this quasi-monopolistic power of the rail- 
way, a great deal of legislation has been enacted in this country. 

Short-distance and long-distance hauling. In several coun- 
tries, such as Germany, Switzerland, Australia, and others, the op- 
posite alternative has been chosen. The government has built and 
continues to operate the railways. In Germany railroad building 
was primarily a military enterprise. In order that she might build 
up her military power and be able to concentrate vast armies and 
supply them at any point, she needed a well-articulated railway 
system. In this respect her policy resembled that of the Romans, 
who were great road builders in their day. Their system of roads 
enabled them to march their armies rapidly from one part of the 
Empire to another, to concentrate wherever concentration was 
needed, and thus to outmaneuver their enemies. 

As to the effects of the two systems on peaceful commerce, there 
are many different opinions. No railway system in the world 
compares with that of the United States in the cheapness and 
swiftness of long-distance freight. Our railways, however, have 
given comparatively little attention to local freight. In the ef- 
ficiency and cheapness with which local freight is handled they 
are far behind the railroads not only of Germany, where the 
government owns and operates the roads, but also of England, 
where they are operated by private companies. 

The difference is probably not to be accounted for on the ground 
of public or private ownership. In a densely populated country, 
where the distances are never very great, it would be quite natural 
that short-distance, or local, freight should form a large part of the 








© Underwood & Underwood, N.Y. 

TRANSPORTATION UNDER IDEAL CONDITIONS, WHERE SPEED, 
SAFETY, AND PLEASURE ARE COMBINED 



i8o ELEMENTARY ECONOMICS 

business of the railroad ; whereas in a country of such vast ex- 
panse as ours it would be equally natural that long-distance freight 
should form the chief part of the railroad business. Each railway 
system therefore tends to specialize in that field where its chief 
business lies. 

Arguments against both sides. No final conclusion is possible 
as to the relative merits of public and private management. As Sir 
Roger de Coverley was in the habit of saying, " Much might be 
said on both sides." The arguments against private ownership 
and operation are based mainly on the monopolistic character of 
the railroad business, the rapacity of railroad managers, and the 
general distrust of ^^ big business." The arguments against public 
ownership and operation are based mainly upon the inefficiency of 
public business, the danger that politics rather than business needs 
will determine rates and other details of the business, and the 
general distrust of the politician. 

These considerations might very properly convince one that 
the same system is not necessarily the best for all countries. In a 
country which is dominated by autocratic and military standards, 
where business is contemptuously spoken of as " shopkeeping," 
where government service attracts a better class of men than busi- 
ness attracts, and where n^en are chosen for high positions not 
because of their talkativeness or popularity but because of their 
knowledge and efficiency, the objections to public ownership and 
operation are weak and those against private ownership and oper- 
ation are strong. In a country, however, which is dominated by 
democratic ideals, where business and all honest occupations have 
always been regarded as just as honorable as government or mili- 
tary service, where, on the whole, business attracts a bettet class 
of men than politics, and where men are chosen for high public 
positions mainly on the ground of their ability to make stump 
speeches rather than on the ground of their knowledge and effi- 
ciency, the objections to government ownership and operation are 
very strong and those against private ownership and operation 
are relatively weak. 



TRANSPORTATION i8i 



EXERCISES 



1. In what sense does transportation differ from other work, since 
all work consists in moving materials ? 

2. Would our modern system of manufacturing have been possible 
without improved means of transportation? Why not? 

^3. What effect has cheap transportation had on the size of markets ? 

4. What kind of transportation developed first? 

5. What were some of the early inventions that helped to improve 
transportation ? 

6. What kinds of transportation are now cheapest? 

7. What are some of the reasons in favor of pubhc ownership of 
the railroads ? 

8. What are some of the reasons in favor of private ownership ? 

9. Is there any final answer that appHes to all countries and all 
times ? 



CHAPTER XX 
MERCHANDISING AND THE PROFESSIONS 

Personal utility. In a previous chapter it was pointed out that 
three kinds of utility are produced by human industry, — form 
utility, place utility, and time utility. It would be possible, if one 
cared to draw somewhat finer distinctions, to speak of personal 
utility as a fourth kind. When an object is transferred from a per- 
son who has little use for it to a person who has a greater use for it, 
its utility, or power to satisfy desires, is increased by the transfer, 
just as truly as though it were transferred from a locality where 
it was not needed to a locality where it was needed. 

There is an ancient fallacy to the effect that someone must gain 
and someone must lose in every trade. Two farmers may trade 
horses and both gain. A potato grower who has a surplus of 
potatoes and a shoemaker who has a surplus of shoes may ex- 
change products to the advantage of both. 

Merchandising may be productive of utility. If it is agreed 
that the power of goods to satisfy wants is increased when those 
goods get into the possession of the people who really need them, 
it ought not to be difficult to see that the individual who helps on 
this process is a productive individual. Even if we leave trans- 
portation and the storing of goods out of account and merely con- 
sider the transfer of goods from one person to another in the same 
locality, we shall find that unless there were merchants or mer- 
cantile houses the various producers would find difficulty in mak- 
ing the necessary exchanges. The farmer with a surplus of wheat 
might have some difficulty in finding a shoemaker who wanted 
wheat and was willing to exchange shoes for wheat. Under a 
highly developed mercantile system a farmer can always find buy- 
ers for his wheat. He can also find a shoe store where he can buy 
shoes, a clothing store where he can buy clothing, and so on. 

182 



MERCHANDISING AND THE PROFESSIONS 183 

These men who specialize in trading are sometimes called 
middlemen, and it is not difficult to see that they are not only 
exceedingly useful but in some cases absolutely necessary. An 
immense amount of time and trouble are saved when every pro- 
ducer can sell directly to a middleman and go on about his work 
of production, while at the same time every consumer can purchase 
exactly what he wants from some merchant. 

The middleman as a timesaver. Generally speaking, it will be 
observed that in any community where the average person con- 
siders his time to be valuable, there are a great many middlemen 
intervening between producers and consumers, and very little 
direct marketing. In a community, however, where wages and 
incomes are low and the average person finds his time of very 
little value, there is a great deal of direct bartering between 
producer and consumer. The open market place, where producers 
and consumers meet, flourishes in communities of the latter type 
but not in communities of the former type. 

"Time is money." There is an old adage that time is money. 
Where time is valuable it is economized ; where it is of little 
value it is not economized. Where the average housekeeper con- 
siders her time valuable she does not care to spend much time 
marketing and dickering with producers who bring their stuff to 
market. She prefers to market by telephone. This is a great 
saving of time, but it is generally expensive in terms of money. 
The problem in economy which every producer and every con- 
sumer must decide for himself is whether his time is worth as 
much as the money which he might otherwise save. It is the 
belief, however, of many students of the problem that the Amer- 
icans have gone too far in the direction of saving time, — so far, in 
fact, as to waste more money than necessary in middlemen's costs 
and profits. 

Marketing sometimes a social function. Another factor en- 
ters into the success of public markets, where producer and con- 
sumer meet. In those countries where the system still prevails, 
going to market has become a social function. The market place 
is the place where citizens meet and where the women make their 



1 84 ELEMENTARY ECONOMICS 

social calls and pay their social obligations. This phase of the 
question has played a very important part in history. The Roman 
Forum, for example, was simply the market place, in which the 
farmers from the surrounding country and the people of the city 
of Rome met, primarily for purposes of exchange and secondarily 
for purposes of social intercourse and political discussion. The 
latter functions gradually displaced the former, and the Roman 
Forum gradually became the center of Roman politics and eventu- 
ally the center of the world. 

Buying large quantities and selling in small parcels. Another 
very important function performed by the mercantile house is that 
of receiving products in large quantities and dividing them into 
small parcels for the consumer. This meets the convenience of 
both producer and consumer. The convenience of the producer is 
met by his ability to sell in bulk; the convenience of the con- 
sumer is met by his ability to buy in small parcels. 

Storing goods. One of the most important functions of the 
mercantile class, however, is that of storing goods. In fact, it is 
still customary to speak of certain mercantile houses as stores. 
The storing of goods produces time utility. They are kept 
from a time when they are not especially needed until a time 
when they are. Their utility is thus increased. This function of 
storing goods is particularly important in the case of goods which 
are produced by a seasonal* industry, such as agriculture. The 
wheat is harvested during one period of the year, but needs to 
be consumed during the entire year. Unless someone were ready to 
store this product, it would have to be used very inefficiently at one 
period of the year, and there would be a scarcity at another period. 

Utility of storing without monopolizing. Contrary to a cer- 
tain popular belief, the effect of storing vast quantities of farm 
products in warehouses is beneficial rather than otherwise. No 
speculator or warehouse owner would have any motive for storing 
products except that of getting a higher price later. He could 
not get this higher price unless the goods grew scarcer. If they 
grow scarcer later, it is very much to the interest of society that 
they be stored rather than consumed at once. 



MERCHANDISING AND THE PROFESSIONS 185 

At a time when prices are very high anyway and it is found 
that a great deal of grain is being stored up there naturally de- 
velops a certain popular dissatisfaction. Being shortsighted, we 
do not appreciate what is likely to be our situation several months 
hence. The only thing we see is that prices are now distressingly 
high. We see this in connection with another fact, namely, that 
large quantities of grain are being stored. We think, naturally 
enough, that if that grain were taken out of storage and sold at 
once, prices would not be so high at the present moment. If, hov/- 
ever, we were a little more farsighted we should look ahead and 
consider what the situation would be later. If grain is to be more 
abundant then than now, the price will fall. If that were the 
expectation nobody would be willing to store a single bushel of 
grain until that time. Everybody who had wheat would want to 
sell it as soon as possible. 

If those who are in a position to judge believe that wheat will 
be scarcer in December than in September, and the price therefore 
higher, they find it to their interest to store it up. If they are 
correct in their anticipation it is very important for society at 
large that they, or somebody, should store up wheat ; otherwise 
we should consume wastefully in the autumn and go hungry in the 
winter. It ought not to take very much forethought or reasoning 
power to understand this. It is, however, a sad commentary on 
the shortsightedness of many of our people that this is so im- 
perfectly understood and that we are so often resentful toward 
those who are performing this important function of storing. 

Another fact which should be taken into consideration is that 
formerly large numbers of people, both producers and consumers, 
did their own storing, whereas at the present time that work is 
turned over to a special group of men who own elevators, cold- 
storage warehouses, and other storage facilities. While both pro- 
ducer and consumer are turning this work over to a special class, 
they must not forget that the only motive which this special class 
has for doing this special work is the hope of a profit. If they 
can give the service cheaper than producers and consumers can 
furnish it for themselves, they have earned a profit. 



1 86 ELEMENTARY ECONOMICS 

Cornering, or monopolizing is destructive of utility. We 

should be careful, however, to distinguish between storing for 
sale on a competitive market and monopolizing for sale on what 
is known as a cornered market. If there were collusion among all 
those who own warehouses or who are in a position to store 
products, — an agreement to control the supply and fix prices 
arbitrarily, — there would be a real grievance. But if we can 
once satisfy ourselves that there is no collusion or attempt at 
monopolization, that the products are being stored for sale on 
a competitive market, we can rest perfectly easy in our minds, 
because no one could make any money by storing in this way 
unless it were genuine social service to do so. By social serv- 
ice, of course, we do not mean philanthropic service, but merely 
useful work. 

Standardization. Another very important function performed 
by the mercantile class is what is known as the classification or 
standardization of goods. The producer of farm products cannot 
produce goods of uniform kind and quality. On every apple tree 
there will be apples of various grades and in every large orchard 
likewise. In every poultry yard there will be fowls of different 
qualities. The consumer who tried to purchase directly from the 
farm might not find exactly the grade or quality which he desired. 
When the farmer sells his products in bulk the middleman will 
frequently classify or grade them into a large number of grades. 
Each hotel and restaurant and every private consumer can get 
from such a dealer exactly what he wants. Multitudes of other 
illustrations could be given, but enough has been said to show that 
merchandising is a very important factor in the economy of 
human energy and the promotion of national prosperity. 

Deception always destruction. It is quite probable, however, 
that certain practices will grow up in connection with merchandis- 
ing which are injurious. There is probably no other branch of 
human industry or business which lends itself so easily to decep- 
tion and adulteration and furnishes such temptations to high- 
pressure advertising and salesmanship. The arts of persuasion are 
developed to a high degree of proficiency and easily develop into 



MERCHANDISING AND THE PROFESSIONS 187 

the arts of deception. It is not necessary to present any arguments 
to show that deception contributes nothing to national prosperity. 

Advertising. Advertising occupies a prominent place among 
the forms in which the art of persuasion is carried to a high state 
of development in modern times. To what extent advertising is 
economically justified has been a difficult question and must re- 
main so. Advertising is sometimes educational. The individual 
sometimes learns from advertisements where he can get something 
which he really wants and has wanted for a long time. This 
applies, however, mainly to new products that have recently been 
put upon the market. One scarcely needs an advertisement to 
tell one of the existence of soap or codfish or to acquaint one with 
the fact that such things are to be purchased at stores. In many 
cases of this kind the only effect of advertising is to persuade the 
consumer to use one man's product rather than another's, and no 
addition whatever is made to the national wealth or to the well- 
being of society. 

Causing productivity in others. Falstaff said, "I am not only 
witty in myself, but the cause that wit is in other men." There 
are many men and women in every community who are not di- 
rectly producing wealth but who are the cause of productivity in 
others. The teacher who trains students in the productive arts is, 
to say the least, a cause of productivity and becomes a contributor 
to national prosperity. The singer, the poet, and the artist who 
inspire to strenuous action and noble deeds likewise contribute 
their share to the greatness of the nation. The military band is 
a part of the fighting strength of the army, even though its mem- 
bers never handle a destructive weapon of any kind. 

The social function of art, religion, etc. A great French artist, 
when he found his country in the throes of the life-and-death 
struggle which began with the invasion of 19 14, speaking before 
a gathering of French artists, said that in that crisis no art would 
be tolerated "which was not noble, robust, proud, and an inciter 
of high thoughts and delicate sentiments — an art of heroic joy." 
Facing the future, he continued : " You would not tolerate any- 
thing less today. Then why should you tolerate anything less 



1 88 ELEMENTARY ECONOMICS 

hereafter, in that tomorrow when our duties shall be changed?" 
Here was a full acceptance of the view that art has an end beyond 
itself and is not its own excuse for being. 

Government. The officers of the government who preserve order 
and protect lives and property contribute a large share to national 
prosperity. An army, whose business may seem to be destruction 
rather than production, by protecting against invasion from with- 
out and insurrection and disorder from within, may be an indis- 
pensable factor in prosperity. 

It is of course possible to have too many so-called nonproducers, 
not only in the army but in public offices of different kinds, as 
well as in the various talking and ornamental professions. The 
work of the soldier, for example, is one of the most honorable of 
all professions so long as national defense is necessary ; but even 
the professional soldier himself will generally agree that it would 
be an excellent thing if war could be eliminated and the work of 
the soldier made unnecessary. The same reasoning may be applied 
to many other occupations. 

Wherein labor contributes to national prosperity and wherein 
it does not. There is a very important distinction between labor 
which contributes to the well-being, prosperity, and greatness 
of the nation and that which does not. Labor may produce a 
commodity which sells for a high price on the market, — which 
satisfies an intense desire which people will pay a high price to 
have gratified ; and yet if the desire is a vicious one, if its grati- 
fication weakens in mind or body those who buy it, or if it merely 
incapacitates them temporarily for useful work, that labor would 
have to be classed as unproductive. On the other hand, the labor 
of the musician, the poet, or the preacher, if it does not tend to 
produce softness but inspires to strenuosity and productivity, if 
it rationalizes the consumption of wealth, if it makes people desire 
the right things, would have to be classified as highly productive. 

Professional and personal service. All labor which is not en- 
gaged in the production or handling of material commodities 
which are bought and sold on the market is grouped in various 
census reports and other public documents as professional and 



MERCHANDISING AND THE PROFESSIONS 189 

personal service. Professional service is limited to a few learned 
or highly skilled occupations such as law, medicine, theology, 
teaching, governing, acting, etc. Personal service includes such 
a multitude of occupations as would fill a small catalogue. Bar- 
bers, bootblacks, valets, domestic servants, and all others who 
render their service directly rather than indirectly through the 
medium of a material product, may be said to render personal 
service. If it is genuine service, whether it is professional or per- 
sonal, it is a factor in the prosperity, power, and greatness of 
the nation. 

EXERCISES 

1. What is meant by personal utility and how is it increased? 

2. Can both parties to a trade gain? 

3. In what sense can merchandising be called productive work ? 

4. Which do you consider more important, to save time or to save 
money ? Why ? 

5. Under what conditions do public markets flourish? 

6. Is storing goods a useful thing to do? Why? 

7. How about monopolizing or cornering? 

8. What is meant by standardizing goods? 

9. In what cases is advertising useful work? 

10. In what senses are artists, government officials, etc. productive 
workers ? 

11. Is all labor productive? 



PART FOUR. EXCHANGE 



CHAPTER XXI 
VALUE: ITS MEANING 

Exchange an important economic activity. Buying and sell- 
ing, or exchanging commodities and services, is one of the chief 
activities in all civilized countries. The reasons for this are very 
simple. If you want a thing you have only three choices : you 
may find or produce it yourself, you may get it from someone 
else, or you may do without it. If someone else happens to have it 
you may find it easier to get it from him than to produce another 
thing like it. But if there is enough of a government to prevent 
3^ou from using violence or fraud, your only chance of getting 
it from him is to make him willing to let you have it peacefully. 
One of the best ways of doing this is to offer him something which 
he would like to have in exchange for it. 

Voluntary agreement among free men. Among all progres- 
sive peoples this method has been so largely followed as to make 
the exchange of goods and services one of the most important parts 
of the national economy. All progressive governments have been 
trying more and more to create conditions under which no person 
is permitted to use force or fraud against any other person. In 
proportion as this is accomplished men are led to get along to- 
gether by voluntary agreement. The system of voluntary agree- 
ment as a means of getting things done has more and more 
displaced authority, force, or deception. Wherever the system of 
voluntary agreement among free citizens prevails, it is as certain 
as anything can be that there will be a great deal of exchanging. 
The reason for this is that it is more economical of time and energy 
to specialize, each one producing what he can produce most suc- 
cessfully and exchanging his products or his services with others. 

There are thus seen to be two reasons for the general system of 
free exchange : first, the government must, by the suppression of 

193 



194 ELEMENTARY ECONOMICS 

violence and fraud, have created the system of voluntary agreement 
as the basis of all organized action among free men ; second, there 
must be a perception of the superior economy of specialization. 

They who live in free countries, under liberal governments, are 
likely to take the system of voluntary agreement for granted, much 
as they take air, sunlight, the sky above, and the earth beneath 
for granted. Few realize that it took many thousands of years of 
painful progress to reach even our present stage. Not realizing 
what it has cost nor how precious it really is, thoughtless persons 
sometimes hold it in light esteem, as they do air and sunlight. 

Exchange a part of the division of labor. The economic ad- 
vantages of exchange will be clearly understood if we recall what 
was said in the chapter on the Division of Labor about the ad- 
vantages of specialization. When the whole industrial society is 
so organized that each person can do that for which he is best 
fitted by nature, training, inclination, and location, the general 
quality of the work is better than it would be if everyone had 
to learn a great many things. It was also pointed out that the 
division of labor necessitates the exchange of products and services. 
Therefore exchange has come to be one of the most important de- 
partments of the subject of political economy. Our whole system 
of trading, transporting, and merchandising is a necessary part of 
an industrial system which is characterized by the division and 
specialization of labor. 

Valuation a part of exchange. An important part of this 
intricate system of exchange is the process of valuation of goods 
and services. It would be difficult to do very much exchanging 
without beginning to think in terms of value. In fact, even in 
the simplest case of barter, as when boys swap marbles, each 
barterer compares in his mind the desirability of the objects that 
are to be exchanged. 

To value is to esteem. To compare the desirability of the 
objects is to think in terms of value. In its original and individual 
sense the value of a thing was the esteem in which it was held ; 
in a somewhat more highly developed, or social, sense the value 
of a thing is the esteem in which it is held by all those who are 



VALUE: ITS MEANING 195 

interested in it. When men in considerable numbers are evaluating 
and comparing the same group of commodities, a market is said 
to exist. Where a market exists for an object, its value is the 
esteem shown for it^on the market. The sign, or symptom, of 
that esteem is the fact that men are making sacrifices in order to 
get the object ; that is, they are either laboring to get it or they 
are giving up other desirable things in exchange for it. 

Value in exchange. This willingness to give something — 
either labor or another desirable object — in exchange for a thing 
has finally come to be regarded by most writers as the value of the 
thing, instead of being, as originally, regarded merely as the sign, or 
symptom, of the esteem in which it was held. A brief but satis- 
factory definition of market value, or of value as it is understood 
on the market and in commercial circles, is " power in exchange." 
Under this definition the value of an article is the power which it 
confers upon its owner to command other desirable things in peace- 
ful and voluntary exchange. There has come, therefore, a change 
in the popular meaning of the word "value." In modern usage 
the esteem in which the object is held, or the desire which is felt 
for it, is that which gives it value instead of being the value itself. 

Need of something to give in exchange. The purchasing 
power, or value in exchange, of an object is not always propor- 
tional to the esteem which is felt for it or the intensity of the 
desire for it. Among wanderers on a desert a small portion of 
water would be exceedingly precious ; but if none of them had 
anything to give in exchange for it, it would not have much pur- 
chasing power. It would not have much market value ; that is, 
its owner would not realize very much from its sale. It would, 
however, be held in the very highest esteem ; it would be intensely 
desired; it would have great power over human motives; men 
would go to any length to get it ; and if they had many things to 
give in exchange for it, it would have great power in exchange. 
The situation of some thirsty men on a desert with nothing to 
give in exchange for water is, however, very unusual. In the 
ordinary market place men have something to give for whatever 
they desire most. The thing which is intensely desired, esteemed, 



196 ELEMENTARY ECONOMICS 

or appreciated will, under such circumstances, always command 
many other desirable objects in peaceful and voluntary exchange. 

Relation of utility to value. There is, therefore, a very close 
connection between utility and value. Utility is the power to 
satisfy a want or gratify a desire, but value is the power to 
command other desirable things in peaceful and voluntary ex- 
change. Value depends upon utility, since nothing could have 
value unless it had the power to satisfy a' desire of some kind. In 
other words, nobody V\^ould give anything in peaceful and volun- 
tary exchange for the article in question unless he desired it. On 
the other hand, hov/ever intensely he might desire it, if he had 
nothing to give in exchange for it, and everyone else were in the 
same condition, it would not have much power in exchange. The 
water in the foregoing illustration would have great utility but no 
great value — certainly no -great market value. 

Censorious criticisms upon market value. There is, however, 
still another sense in which both value and utility are sometimes 
used. One who has strong ideas on the subject will sometimes 
assert that a given commodity is "really worth" very little, even 
though everybody seems to desire it and to be paying a high price 
for it, or that it is "really worth" a great deal, even though 
no one else seems to esteem it or to be willing to pay much 
for it. In this case the speaker is assuming the function of a 
moral or economic censor and is passing judgment upon the 
desires of other people. His judgment may be sound and that 
of the multitude unsound, or vice versa. There are, however, 
always those who have ideas on the subject of "real" value as 
opposed to market value and of real utility as opposed to the 
popular idea of utility. Their idea of "real" utility is the power 
to satisfy a commendable desire, whereas economic writers have 
•generally, though not universally, defined utility as the power to 
satisfy any sort of desire. 

Distinction between value and price. Value should also be 
distinguished from price. The price of an article, as has been ex- 
plained many times is merely its value expressed in terms of 
money ; that is, of some single commodity which the community 



VALUE: ITS MEANING 197 

has generally agreed upon as the measure of value and the medium 
of exchange. Whenever the word "price" is used, if it is used 
properly, it means value expressed in money, or the amount of 
money which will be given in exchange for a certain article. 
Wherever the word "value" is used, at least in connection with 
the general conditions of the market, it means its general power 
in exchange against other articles, of which money is only one. 
The cheapening of money tends to create a general rise in prices 
but not a general rise in values. 

To summarize, the economic value of an object is variously 
defined as 

1. Its price ; that is, the amount of money for which it sells. (This 

is a wrong use of the word "value.") 

2. Its utiHty, which may mean 

a. Its power to satisfy any desire. 

b. Its power to satisfy a commendable desire. (This also is 

a wrong use of the word "value.") 

3. Its power to affect the well-being of 

a. An individual. 

b. Society, or the nation. (This comes nearer to the point.) 

4. Its power over human motives : 

a. Causing men to exert themselves in order to get it. 

b. Causing men to give other desirable things in exchange for it, 

because of 
(i) The intensity of their desire for it. 
(2) The abundance of other desirable things in their possession. 

Since we are here concerned with the general problem of ex- 
change and market value, the last of these four definitions will 
be used in this chapter. If we may accept "power in exchange" 
as a good working definition of market value, or value as it is 
used on the market and in our general system of exchange, several 
questions will at once arise. One of these is. Why do some things 
possess this power and others not? Another is, Why do some 
things possess more of it than others ? Or, again. Why does the 
same thing possess more of it at one time or place than at 
another ? 



198 ELEMENTARY ECONOMICS 

EXERCISES 

1. Why do we do so much buying and selling ? 

2. What are the principal ways of getting a thing which you want? 

3. How can you get a desirable thing from someone else without 
force or fraud? 

4. In what proportion of the cases where you work in association 
with other people do you work under voluntary agreement and in 
what proportion do you work under authority? 

5. What is the relation of exchange to the division of labor? 
Could there be much speciaHzation without exchanging goods and 
services ? 

6. Could there be much exchanging without some estimation of 
the desirability of the things exchanged? 

7. What is the simplest meaning of the value of a thing? 

8. Does the esteem in which a thing is held always and everywhere 
determine its power in exchange? Give illustrations. 

9. What is the relation of utility or usefulness to value? 

10. Is everything "really worth" exactly what it will bring on the 
market? 

11. How would you distinguish between value and price? 



CHAPTER XXII 
VALUE: ITS CAUSE AND QUANTITY 

Value attaches to concrete things. Not much headway can 
be made in discussing the question of value until we distinguish be- 
tween things in general and concrete units of things. Before speak- 
ing of the value of bread in general it is necessary to speak of the 
value of a loaf of bread. Before speaking of the value or the lack 
of value of air in general we must speak of the value or lack of 
value of a given cubic yard of air. 

If one will look around and see what is going on, one will notice 
that men are not exchanging things in general, but only concrete 
units or quantities of things ; not wheat in general, but a given 
number of bushels of wheat of a given grade ; not money in gen- 
eral, but a given number of dollars, francs, or pounds. Even if air 
or water were exchanged, it would not be air or water in general, 
but some cubic yards or gallons in definite number. 

This distinction between things in general and concrete units or 
quantities will eliminate forever the confusion that sometimes arises 
when that distinction is not made. For example, we are some- 
times told that air is of immeasurable utility, yet it has no power 
in exchange. If one will think, however, not of air in general but 
of a definite cubic yard of air which may be boxed up (it might 
even be offered for sale), and then if one will ask one's self how 
much utility to him is possessed by that particular cubic yard of 
air, he will find that it is of no use to him whatever. If it were 
of any use to him — that is, if he would be any better off with it 
than without it — he would be willing to give something in ex- 
change for it ; it would then possess: value, or power in exchange. 

Total utility and final, or marginal, utility. This means, in 
other words, that there are two distinct ideas of utility : one is 
total utility, and the other is sometimes called specific, sometimes 

199 



200 ELEMENTARY ECONOMICS 

final, and sometimes marginal, utility. We gain an impression of 
the total utility of air when we think what would happen to us if 
all the air in existence were suddenly annihilated or if we individu- 
ally were shut off from access to air. From this point of view the 
total utility of air is incalculable. But if we were to consider what 
would happen if a definite cubic yard were annihilated or if we were 
shut off from access to it, we get a very different impression. As a 
matter of fact, it would make no difference to anybody, because 
there would be enough left to satisfy completely every desire for air. 

The question of more or less. In this world of adjustment, 
improvement, and progress, or of maladjustment and retrogression, 
the problem of having more or of having less of various things is 
always the important problem. How desirable is it that there 
should be a cubic yard or a cubic mile more of air than there is, 
or how undesirable is it that there should be a cubic yard or a 
cubic mile less than there is ? Apparently this would be a matter 
of indifference. It is for this reason that in a practical, workaday 
world, where we are trying to improve our condition or to prevent 
it from becoming worse, we place a value on only those things 
which we desire to see increased. 

No social utility would be promoted by increasing the supply 
of air or by offering a price for increasing it. There is, therefore, 
no social or individual reason why it should possess any value or 
anj^ power in exchange. On the other hand, if you think of an 
article of which you can say that you would be better off if you 
had a little more of it, or worse off if you had a little less than you 
have, you have a perfectly good individual reason for increasing 
your possession. Of if the community can say that it would be 
better off if it had more of it, or worse off if it had less, theri the 
community would have a perfectly good reason for desiring to in- 
crease the supply. This is the case with everything that has value. 

The moralist's valuation. A moral philosopher might con- 
clude otherwise ; that is, he might think that the desires of the 
people were vicious and that they would be worse off if they had 
more of a certain article, whereas they themselves think they 
would be better off if they had more of it. It is the desires of the 



VALUE: ITS CAUSE AND QUANTITY 201 

multitude rather than the conclusions of the moral philosopher 
which determine market value. 

The function of value in a society is to induce producers to 
produce. It is a symptom that more of the article possessing value 
is wanted. It is, at the same time, a means of getting more ; that 
is, if people will offer desirable things in exchange for an object, 
someone may be induced to produce it. 

The first law of the market. The first law of the market is 
that things of the same kind and quality tend to have the same 
value at the same time and place. That is to say, at any given 
time and place, if there are many units, all exactly alike and 
equally desirable, they will all tend to sell at the same price or to 
have the same power in exchange. If they are unlike, some of 
them being more desirable than others, of course some will have 
more power in exchange than the others. Again, the values may, 
on a feverish market, change from minute to minute ; that is, 
so rapidly as to create the illusion of selling at different prices at 
the same time. Or, again, in different portions of the same market 
similar things sometimes sell at different prices. The tendency, 
however, is toward a uniform price at the same time and place. 

Where a commodity has become standardized so that there are 
many units that are equally desirable, it has become customary to 
buy the article by quantity without taking the trouble to pick out 
the specific units desired. Wheat, coal, cotton, pig iron, and many 
other commodities are so graded and standardized as to sell in 
this way. On the other hand, there are a great many commodities 
that are not easily standardized. In these cases the purchaser will 
usually insist on picking out the individual units which he desires. 
Race horses, dwelling houses, farms, building lots, and a multitude 
of other things will probably always have to be bought and sold 
in this way. 

A thing has value only when someone wants it. A concrete 
article of the kind just described or a definite quantity of a 
standardized article will have power in exchange, of course, only 
on condition that somebody happens to desire it. No one will 
give any desirable thing in peaceful and voluntary exchange for 



202 ELEMENTARY ECONOMICS 

something which he does not desire to possess. Again, the quantity 
of value which a thing will possess— that is, the number of other 
things which will be given in exchange for it — will depend on 
how much it is desired in comparison with those other things. If 
the article in question is very much wanted and a number of other 
things are not much wanted, then a considerable quantity of these 
other things will be given in exchange for it. 

Two reasons why a thing may not be wanted. The next 
question is, Why are some things desired and others not? And 
why are some desired more than others ? There are two primary 
reasons why an article may not be desired at all. In the first 
place, it may possess no total utility ; that is, there may be no use 
to which it can be put, so far as anyone knows. There are not, 
however, very many such things. The other reason is that there 
are so many other things just like the one in question as to more 
than satisfy the desire. Where water is very scarce the desire for 
it becomes intense; where it is abundant the desire is completely 
satiated, so that if a specific barrel or gallon of water were offered 
for sale no one would desire it at all. In such a situation water 
would have as little value as though there were no possible use to 
which it could be put. 

One might go even farther and name articles which, though 
capable of satisfying desires or of being put to important uses, 
have yet become worse than worthless ; that is, have become 
nuisances through their overabundance. Many of the weeds which 
infest our fields belong in this class. Water in a swampy region 
also comes to possess a negative value, — that is, men will go to 
considerable expense to get rid of a part of it, — and yet it may 
be perfectly good water, capable of contributing not only to human 
life but to plant and animal life as well. Rabbits in Australia and 
English sparrows in America will serve as further illustrations. 

A commodity has value only when there is not enough of it. 
We therefore reach the general conclusion that an article (that is, 
a definite object, such as may be bought and sold) has value only 
when it is wanted, and that it is wanted only when there are so 
few objects like it as to leave the desire for it partially unsatisfied. 



VALUE: ITS CAUSE AND QUANTITY 203 

Following the same line of reasoning, we may reach the further 
conclusion that an object has much value when it is much desired 
and little value when it is not much desired. Its power in exchange 
as compared with other things will depend on how intensely it is 
desired in comparison with other things. 

Physiological basis of the law of demand and supply. The 
great law of supply and demand is thus seen to have a physiolog- 
ical and psychological basis. The expression "supply and de- 
mand" is merely a formula; back of this formula there is the 
physiological fact pointed out in Chapter II. Every desire is 
satiable, and the more nearly the desire approaches the state of 
complete satiation, the less intense it becomes. Thus the reason 
that any superabundant article under ordinary circumstances has 
no value is because it is so abundant that every desire is completely 
satiated. With a given demand, the greater the supply the more 
nearly all desires will approach the point of satiation, and the 
more indifferent everyone's attitude toward the object becomes; 
on the other hand, the smaller the supply the more intense the 
desire for each unit of that supply, and the more anxious men 
are to get it. 

Meaning of scarcity. WTien we say that an article has value 
only when the desire for it is left unsatisfied, we are virtually 
saying that it has value only when it is scarce. Scarcity is, by 
definition, insufficiency to satisfy desires. A thing may be rare 
without being scarce — that is to say, however little there may be 
of a certain article, if that little is more than sufficient to satisfy 
all desires the article can hardly be said to be scarce ; or how- 
ever much there may be of a thing, speaking absolutely, if there is 
not enough to satisfy all desires it is said to be scarce. Flies in the 
winter time may be rare, but they are not scarce in the technical 
economic sense, since even then there are more than are wanted. 
If we assume that the article in question is appropriable, or ca- 
pable of being possessed and enjoyed, and not, like the moon, en- 
tirely beyond our reach, we may say that anything which is both 
desirable and scarce will have power in exchange and that nothing 
else whatever will have that power. 



204 ELEMENTARY ECONOMICS 

Social value. We now approach a secondary phase of the law 
of value. Even though a man's desire for apples may be com- 
pletely satiated, not only in the present but in the anticipated 
future, his commercial instinct may prompt him to prize them. 
He will prize them not because he himself desires to consume them 
but because he can trade them to someone else for objects which 
he himself desires. At this stage he has arrived at the point where 
he begins to take account of social utility as well as of individual 
utility. If he perceives that there is in society around him an 
unsatisfied desire for apples, he may make use of that unsatisfied 
desire to acquire desirable things in exchange for his own surplus 
apples. He is able to use to his own advantage this power in ex- 
change which commodities possess on the market. Thus we see a 
great many men producing articles far in excess of their own needs 
because they know that these articles are exchangeable for other 
things which they need. We see a considerable body of men doing 
nothing except to trade in objects of general social desire. But 
the laws which govern social valuation are fundamentally the same 
as those which govern individual valuation. There must be some- 
body in the community who has less of the object than he wants ; 
otherwise neither the producer nor the trader would be able to 
exchange the object for other desirable things. 

Diminishing utility. Desire and utility are reverse aspects of 
the same thing. The desire exists in the human being and is that 
which the object of the desire is capable of satisfying. Utility 
exists in the object and is that which is capable of satisfying 
the desire of a human being. Since every desire is capable of 
being satiated, the more nearly it comes to being satiated the 
less intense the desire becomes. That is why the desirability 
of a thing diminishes as its quantity increases. This again is the 
physiological basis of the law of supply and demand. 

Summary. To summarize, we find (i) that only concrete 
units of desirable things are bought and sold ; ( 2 ) that such units 
have value only when there are not enough to go around and 
satisfy everybody ; (3) that each human desire is capable of being 
completely satisfied or satiated ; (4) that when and where a thing 



VALUE: ITS CAUSE AND QUANTITY 205 

is so abundant as to satiate every desire for it, it has no value ; 
(5) that when it is so abundant as nearly to satiate every desire 
for it, each unit will have little value, because it will not be in- 
tensely desired ; ( 6 ) that when a thing is so scarce as to leave 
many desires far from satiation, each unit will have much value, 
because it will be intensely desired. 

EXERCISES 

1. Do men buy and sell things in general or concrete units of 
things ? Illustrate. 

2. What is the difference between total utiHty and marginal utility? 
Illustrate. 

3. If someone were to box up a cubic yard of air and offer to sell 
it to you, himself requiring the return of the box, would you buy it? 
Why not? 

4. If someone were to offer to sell you a gallon of water when you 
were standing by a lake, would you buy it ? Why not ? Would you 
buy it if you were in a desert ? Why ? 

5. Would the community where you live be better off if it had more 
water? Does water command a price in your community? Is your 
country a dry or a wet country? 

6. What is the first law of the market ? 

7. Would a thing have value unless someone wanted more of it 
than he had already? 

8. What is meant by scarcity? Is it the same as rarity? 

9. What is meant by the satiabiUty of a desire ? 



CHAPTER XXIII 

SCARCITY 

Causes of scarcity. It was shown in the last chapter that a 
thing must be both desirable and scarce in order to possess value. 
We have now to inquire why such things are scarce. There are 
four reasons which come within the limits of our comprehension. 
These we may call (i) "the niggardliness of nature," (2) the 
expansion of desires, (3) the cost of production, and (4) monopoly. 

"Niggardliness of nature." When the term "niggardliness of 
nature" is used, it is not intended to cast reflections upon nature 
nor to imply that she is not bounteous in many respects. It is 
merely to call attention to a fact which cannot well be disputed ; 
namely, that in many places men have congregated in numbers 
greater than nature has provided for. Desirable things are 
scarce in those places, and it is at least necessary to bring 
supplies from other places, where there is a surplus. More- 
over, there are many things that we desire which nature does not 
supply at all in the form in which we desire them, though she 
supplies the raw materials out of which we may make them. 
Again, some things which we desire can be produced only at cer- 
tain times and seasons. They must therefore be preserved and 
kept for other times when they will be needed. 

Expansion of desires. The fact that nature does not supply 
us with everything we desire in the exact forms and at the exact 
times and places when and where we happen to desire them may 
be due, first, to the fact that we desire more refined products than 
grow in a natural state ; or, second, to the fact that great numbers 
of us choose to live in places where such products do not grow in 
sufficient abundance. Therefore we must expect an indefinite con- 
tinuation of the condition wherein some desirable things are in- 
sufficient to satisfy everybody. We shall therefore continue trying 

206 



SCARCITY 



207 



to increase the supply of desirable things in the forms in which 
they are wanted and at the times when and the places where they 
are wanted. This is called the production of utilities or, more 
properly, the adding of utilities to material things, — form utility, 
place utility, and time utility. 

Cost. If the efforts which we have to make in order to get use- 
ful things were altogether pleasant and not in the least degree 
unpleasant or disagreeable, there is no reason why most things 
might not be produced in such abundance as to satisfy everybody 
completely. Some things, of course, cannot be increased by any 
human effort. Meteoric iron has long served as an illustration. 
Autographs of distinguished men of the past, the paintings of old 
masters, first editions of books, and a number of other illustrations 
might be given. But if we are speaking of an ordinary reproduc- 
ible commodity, we are safe in saying that unless there were some 
difficulty in the way of indefinite reproduction, — some unpleasant- 
ness, irksomeness, or fatigue connected with its production, — 
its supply would certainly increase until everyone had all he 
wanted of it. 

Effort not always irksome. Illustrations are not hard to find 
of desirable commodities which have to be secured by human 
effort, but which, because the effort is pleasant rather than un- 
pleasant, become so abundant as to command no price. Trout are 
generally regarded as a delicacy and are greatly desired. They can 
be caught only by considerable muscular effort and by the exercise 
of great patience and skill. And yet, in certain communities where 
the demand is not very great and the fishing not too arduous, trout 
are caught for sport in such numbers as to supply the neighbor- 
hood. They become free goods and are given to those who desire 
them without money and without price. If there were more con- 
sumers, or fewer persons who enjoyed the sport of fishing^ there 
would not be enough to go around. Those who did not get as many 
as they desired would then be willing to pay a price in order to get 
more. The price would be paid, virtually, to overcome the disin- 
clination of producers ; that is, the disinclination of unenthusiastic 
fishermen. 



2o8 ELEMENTARY ECONOMICS 

Disinclination. All the reproducible things which sell on the 
market and which are not monopolized are limited in supply 
by some form of disinclination or reluctance to carry on the work 
of production. This disinclination may resemble that which one 
finds in the average fisherman, to whom the work in small doses 
is not irksome, or it may be of a different sort altogether. In the 
case of the fisherman, his work may be pleasant rather than un- 
pleasant up to a certain point. Almost anyone likes a certain 
amount of this kind of work, though some of us are easily satisfied. 
Beyond that point such work becomes irksome and fatiguing, and 
we keep at it only on condition that someone pays us for it. Up to 
that point it was play ; beyond that point it literally becomes work. 

Opportunity cost. Where two kinds of work are pleasurable 
and a person has to choose between them, the fact that he has to 
surrender the one form of pleasure in order to pursue the other 
introduces an element of cost or sacrifice. It is reported of a 
certain man that he was passionately fond of gardening, but could 
never stick to it, because as soon as he began to dig he found 
worms, and they reminded him of fishing, of which he was even 
fonder than of gardening, which then became irksome. 

In other cases the work is disagreeable from the very start. 
There is no element of play in it. No one will do any of it unless 
he is paid for it. In still other cases the work itself would be 
pleasurable rather than disagreeable up to a certain point, if it were 
not for the fact that there is something else that one would rather 
be doing. A boy might not ordinarily mind working in the garden, 
but when there is a circus in town or a ball game going on, 
gardening suffers in his estimation by comparison with these other 
opportunities. Whenever we have to work long hours there are 
pretty certain to be many other and more pleasurablie things which 
we would rather do. Having to give up these other opportunities 
would make our work irksome even if it were not so of itself. 

The resistance which has to be overcome in order to get men 
to work. Cost, or cost of production, is the general name which 
we apply to the resistance which has to be overcome in order to 
get a thing produced. The real resistance is the resistance of the 



SCARCITY 209 

human will, as shown by the fact that even though physical effort 
has to be put forth, so long as the effort is pleasurable it does not 
have to be paid for. As soon as it becomes irksome it has to be 
paid for. It is a matter of choice, and the price paid is a means 
of influencing choice. The irksomeness of the effort causes men 
to choose against putting forth the effort ; the price paid for the 
article causes them to choose in favor of it. 

Distinction between play and work. The difference between 
play and work is found just here. Play is effort of both mind and 
body which is put forth for the sheer pleasure of the effort itself. 
Work is effort which is put forth for the sake of some other re- 
ward. Under very favorable circumstances all necessary effort 
might conceivably take the form of play, and in that case there 
would be no such thing as cost of production. A community made 
up of people with very simple habits and very strenuous natures, 
and in a very favorable environment, might possibly reach such 
a delectable state. Having very simple habits, the inhabitants of 
this community would be able to get the greater part of their 
higher satisfactions out of those things whereof nature is boun- 
teous, such as the sky, the clouds, the verdure, and pleasant 
company. Living in a very favorable environment, they could pro- 
duce such things as had to be produced with little effort. Having 
very strenuous natures, abounding in energy and delighting in 
effort, they could do the necessary work of production without 
any disinclination or reluctance. This, however, would be a 
kind of earthly paradise which we may dream about but are not 
likely to realize. 

Kinds of cost. When we say that the price of an article has 
to be high enough to cover the cost of production, we really mean 
that it has to be high enough to overcome the disinclination of 
men to do whatever is necessary in order to produce it. This dis- 
inclination, or cost, is of various kinds and degrees. Mention has 
been made of those operations which are inherently disagreeable 
from the very start. This may be called disutility, or pain cost. 
In other cases there is no disinclination until the work has been 
carried so far as to produce a sense of fatigue. This may be called 



210 ELEMENTARY ECONOMICS 

fatigue cost. Again, the disinclination may be due to the fact that 
the work in question prevents us from doing something else which 
we would rather be doing. This is called opportunity cost. The 
opportunity which one gives up may be of two kinds : the thing 
which one gives up may be pleasurable in itself (that is, it may 
be play or amusement) or it may consist in the opportunity to 
earn money at some other job. In either case one must be paid 
for doing the thing in question, even though it is neither painful 
nor fatiguing, otherwise one will avail one's self of another 
opportunity. 

Diminishing importance of pain cost. Of these three forms of 
cost, pain cost is, in our day, the least important. In a rude state 
of society, when conditions were hard and enemies numerous, it 
may have been different. Nowadays, outside of a few dirty, dan- 
gerous, or otherwise disagreeable occupations, there is compara- 
tively little work which is disagreeable in itself. When hours are 
long, much of it is likely to be fatiguing and irksome for that 
reason. 

As prosperity and well-being increase, and general social con- 
ditions improve, opportunity cost comes to play a more and more 
important part. Even the possession of high wages or a large 
income creates opportunities for amusement or pleasure which 
otherwise would not exist. One then finds long hours more irk- 
some than they would otherwise be, not because they are more 
fatiguing, but because they deprive one of those opportunities for 
pleasure which one's larger income enables one to enjoy. A well- 
educated man has more opportunities for the pleasurable exercise 
of his faculties than an uneducated man ; therefore he needs more 
time in which to do these pleasurable things. If his services are 
desired, he must generally be paid more in order to induce him 
to give up these other opportunities. Far more important than 
that, however, is the fact that a well-trained man has many more 
opportunities to earn money than an untrained man. Among these 
opportunities he will choose only the one which he likes best. 
Whoever desires his services or his products must therefore bid 
against all other opportunities which lie before the trained man. 



SCARCITY 211 

Increasing cost. As population increases or concentrates in 
certain areas, the natural resources of those areas must either be 
worked more intensively or else the means of subsistence as well 
as the raw materials of industry must be brought from greater 
distances. To bring them from greater distances obviously re- 
quires greater effort, unless new and improved methods of trans- 
portation are invented. Even with the best methods attainable 
it costs more to haul longer than shorter distances. To work 
mines harder tends to exhaust them more rapidly. It is also pos- 
sible to work land so intensively as to exhaust the soil unless 
greater care is taken to put back in the soil as much plant food as 
is used up by the crops which are taken off. To exhaust either the 
mines or the soil will obviously make greater and greater efforts 
necessary if a large population is to be provided for on the same 
scale as before the exhaustion took place. Poorer mines must be 
worked, and crops must be grown on poorer soil where more effort 
is required to get the same crop. 

Diminishing returns and increasing cost. Entirely apart from 
the exhaustion of the soil, however, is the great law of diminishing 
returns from land. This law, which is one phase of the universal 
law of variable proportions, will be discussed in detail in a chapter 
devoted to that subject (see Chapter XXIX). For our present 
purpose it is necessary only to state and define the law. 

It is a well-known fact that land yields more per acre under 
intensive than under extensive cultivation. By intensive cultiva- 
tion is meant the application of considerable quantities of labor 
and capital to each unit of land ; by extensive cultivation is meant 
the application of smaller quantities of labor and capital. While 
land can be made to yield more when large than when small 
quantities of labor and capital are used in its cultivation, still 
there are limits to this rule. In the cultivation of any particular 
crop there comes a point beyond which it does not seem possible, 
by any amount of labor, care, or cultivation, to increase the yield 
appreciably. Long before this point is reached, however, there is 
a tendency for the land to yield less in proportion to the labor 
and capital employed, even though it continues to yield slightly 



212 ELEMENTARY ECONOMICS 

more in proportion to the acres cultivated with each increased 
application of labor and capital to its cultivation. 

Rather than incur the increasing cost of production which would 
be necessary if an increasing population should attempt to get its 
subsistence from the same soil, men have uniformly chosen to 
spread their cultivation over wider areas, thereby incurring in- 
creased cost in transportation, or they have resorted to inferior 
soils within the boundaries of the original area, or they have done 
both. There is no good reason in the world why they should ever 
have done either of these things except that which is furnished 
by the law of diminishing returns. 

We have, therefore, several reasons why increasing effort is 
necessary to get increasing supplies for an increasing population. 
The law of diminishing returns is one; the tendency toward the 
exhaustion of the soil, mines, and other natural resources is 
another ; the necessity of cultivating inferior soils is another ; and 
that of transporting materials greater distances is still another. All 
of these, however, are closely joined together, and they mutually 
determine one another. Add to these the fact that increasing effort 
becomes increasingly irksome both because of increasing fatigue 
and of increasing opportunity cost, and we have what may be 
known as the law of increasing cost. This law of increasing cost, 
in turn, is the chief factor in limiting production and keeping the 
supply of various commodities so scarce as to give them a value. 

Monopoly. Among the factors which tend to make commodi- 
ties scarce nowadays, one of the most important is monopoly. 
A monopoly is an agency which has sufficient control over the 
supply of a given commodity to fix its price. Without this control 
over the supply, neither principalities nor powers nor trusts can 
control prices. Without this control over supply, any attempt to 
fix prices above that level which would pay the cost of production 
would merely tempt other producers to enter the field and take 
the market away from the would-be monopoly. 

Aside from the government, probably no such thing as an 
absolute monopoly exists. A partial monopoly exists whenever 
an organization exercises sufficient control over the supply of 



SCARCITY 



213 




214 ELEMENTARY ECONOMICS 

anything to enable it to fix its price, even within a narrow zone, 
independently of competition. This means that the power of a 
partial monopoly over prices is not absolute. It may fix the price 
somewhat higher, but not much higher, than competition would 
fix it. Where a monopoly is not absolute, if it attempts to fix 
prices outside these limits it will create competition and destroy 
its power to control. 

This control may be exercised in two ways : first, the monopoly 
may decide upon the quantity to be produced and then sell that 
quantity for whatever it will bring on the market, allowing the 
law of demand and supply to fix the price ; second, the monopoly 
may decide upon the price at which it will sell the product and 
then produce only as much as can be sold at that price. This is 
the method usually followed. 

In a genuinely competitive industry the supply is limited by 
the cost of production. Producers will stop production rather than 
sell for any considerable time below the cost of production. 

EXERCISES 

1. What are the leading causes of scarcity? 

2. What is meant by the ''niggardliness of nature"? 

3. What is meant by the expansion of desires ? 

4. Suppose that a thing could be produced indefinitely without 
cost, would it have any value? 

5. What is cost and what are its principal forms ? 

6. Does it cost you anything to play baseball ? If so, in what sense ? 
Are you disinclined to play ? Do you have to be paid to play ? 

7. What is the real difference between work and play? 

8. Are you disinclined to go fishing ? Do you have to be paid for 
it? Suppose that it interfered with something else that you would 
rather do. 

9. What is meant by opportunity cost ? 

10. Is opportunity cost growing more or is it growing less important ? 

11. What is the relation of diminishing returns from land to the 
cost of growing crops ? 

12. How does a monopoly control prices ? 



CHAPTER XXIV 

MONEY 

Money a labor-saving invention. If there is economy in 
specializing in production and exchanging products, there must 
be further economy in any means or device which enables us to 
make our exchanges with less trouble. Money is such a device. 
It is, in fact, one of the greatest of all labor-saving devices. If 
one will try to imagine the difficulties of carrying on exchange 
without the use of money, — that is, by means of direct barter, — 
one will easily understand how great a convenience money is. 
Of course, without the use of some kind of money we never could 
have developed our present highly specialized industrial system. 

Even if we could imagine an industrial system based on barter, 
the difficulties would seem almost insuperable. The tailor who had 
made a coat and desired bread in exchange might find difficulty in 
finding a baker who happened to want a coat. The dairyman who 
had milk to sell would find it difficult to know how to collect pay- 
ment for the very small quantities which he delivered to the 
butcher, the baker, the tailor, etc. These difficulties would be so 
great that, in all probability, there would be comparatively little 
exchanging. The farmer would have to be his own butcher, tailor, 
and shoemaker. Each household, in fact, would have to be almost 
self-sufficing. 

Various substances which have served as money. Various 
commodities or articles have served the purpose of money. The 
early colonists in America found the Indians using a kind of cur- 
rency known as wampum, or bead currency. The Hudson Bay 
Company and other companies that traded with the Indians of the 
interior developed a skin or fur currency, in which the skins of 
various animals were recognized as standards of value and 
exchanged at the ratios agreed upon. In ancient times various 

215 



2i6 ELEMENTARY ECONOMICS 

European peoples used cattle as currency. In the Homeric poems 
values are frequently quoted in terms of oxen. 

So great is the need for money in a society where there is any 
exchanging of desirable articles that almost anything which is 
commonly used and appreciated may serve the purpose of money. 
Among primitive herdsmen, therefore, cattle met the conditions. 
They were universally esteemed and appreciated, they were fa- 
miliar objects whose value was generally understood, and they 
were easily transferable. They lacked, however, certain other 
qualities which make modern metallic money convenient. 

Qualities which the money material should possess. Jevons, 
in his "Money and the Mechanism of Exchange," names seven 
qualities which are desirable in the material of which money is 
made. They are, first, utility and value ; second, portability ; 
third, indestructibility ; fourth, homogeneity ; fifth, divisibility ; 
sixth, stability; and seventh, cognizability. Cattle possess only 
the first, second, and seventh of these qualities and, perhaps, to 
a slight degree the sixth. That they are useful to primitive herds- 
men is rather obvious. They furnish their own portability in that 
they can carry themselves about. They possess cognizability be- 
cause all are familiar with them. There may be a certain stability 
also in their value, though that is by no means certain. The skins 
of animals, used as money by hunting tribes, possess the same 
qualities as cattle, but still lack the others which Jevons deems 
desirable. 

Precious metals especially adapted. It has been found that 
the precious metals, especially gold and silver, possess all these 
qualities in superior degree. If by utility we mean desirability, 
or the capacity to satisfy a desire, there is no doubt that gold 
and silver possess this quality. They possess portability because 
there is considerable value in small bulk. This would not be true 
of the coarser metals. They possess indestructibility in a high 
degree ; they do not corrode or rust as iron would. They possess 
homogeneity — that is, gold of equal purity is essentially alike the 
world over ; it may be easily standardized as to quality, so that 
one piece of metal may be exactly as desirable as every other piece 



MONEY 



217 



of the same size and standard of fineness. They possess divisibil- 
ity — that is, a piece of gold or silver may be divided into smaller 
pieces, and each of the smaller pieces will have a value in exact 
proportion to its size. Each may be melted down and recombined 
into larger pieces, and each piece will still have value in proportion 
to its size. This would not be true of diamonds and precious 
stones, though these would 



possess portability and in- 
destructibility in high degree. 

Gold and silver possess 
stability of value in a very 
peculiar sense. Over long 
periods of time they will 
fluctuate considerably, but 
over short periods of time — 
that is, from week to week, 
from day to day, from hour 
to hour — they will fluctuate 
very little; whereas other 
commodities, such as farm 
products, pig iron, and other 
articles, which are largely 
dealt in, fluctuate rapidly 
over short periods of time. 

Reasons for the stability 
of gold prices. One reason 
for the stability of the value of the precious metals during short 
periods is that the mass of gold or silver in existence at any one 
time is very large in proportion to the product of any given year. 
The total amount of wheat in existence at the present moment has 
practically all been produced within the last year, or two years at 
the outside. Of the total gold in existence a very small fraction 
was produced within the last year or two. 

Since most of the transactions in which we use money are short- 
time rather than long-time transactions, it is more important that 
the money material be stable in value over short periods than over 




COINS OF SYRACUSE 



2l8 



ELEMENTARY ECONOMICS 



long periods. This is one of the principal reasons why gold and 
silver serve the purpose of a money material better than most 
other products. 

As to cognizability, the superiority of gold and silver over other 
materials is not so great. The expert can always apply tests by 
means of which he can detect spurious coins, but the inexpert 
usually has to depend upon his eyes and his ears and his sense 
of touch. But there are not many other substances which cannot 
be adulterated or of which counterfeits may not be made. Gold 
and silver are not particularly wanting in cognizability, though 
they are not preeminently superior in this respect. 

For certain minor coins, however, neither gold nor silver is 
well adapted. There is so much value in such small bulk in gold, 
for example, that one would need a magnifying glass and tools 
more delicate than the human fingers to handle gold coins of the 
value of our five-cent pieces and one-cent pieces. Mere physical 
convenience requires a coarser metal for these small values. 

The following forms of money are in use in the United States. 



Coin-; 



Silver 



KINDS OF MONEY IN THE UNITED STATES 

r Double eagle 

rcoidj^t' , 

I Half eagle 
[^ Quarter eagle 
Dollar 
Half dollar 
Quarter 
Dime 
Nickel (five-cent piece) 
I Bronze (one-cent piece) 
Gold certificates 
Silver certificates 
Treasury notes 
Paper ^ United States notes (greenbacks) 
National bank notes 
Federal Reserve notes 
, Federal Reserve bank notes 



MONEY 219 

The coins are so familiar as to require no description. Their 
differences appeal readily to the eye. It is noticeable, however, 
that comparatively few people note carefully the different kinds 
of paper currency. The first three forms of paper currency men- 
tioned in the above outline may be called warehouse receipts. For 
the convenience of the people the Federal Treasury issues these 
receipts in return for deposits of other forms of money. If, for 
example, one has a large quantity of gold or silver coin and desires 
something more convenient, he may deposit the coin with the 
Secretary of the Treasury and receive in return gold or silver 
certificates. These merely certify that the coin has been deposited 
in the Treasury. These certificates then circulate as money. 

The United States note, popularly known as the greenback, is 
issued by the Federal government as pure credit currency. The 
issue of these notes was authorized by act of Congress during the 
Civil War as a means of financing the war ; that is, as a means of 
paying the obligations of the government. The amount then au- 
thorized, with only a slight reduction, has been kept in circula- 
tion ever since. The national bank notes are technically known as 
national currency. They are secured by United States bonds or 
other securities deposited with the Secretary of the Treasury. 
They are issued to the bank making the deposit and bear on their 
face the name of the bank. It is the bank, however, which agrees 
to pay, rather than the government ; the government merely stands 
behind the bank. 

The Federal Reserv^e notes are issued to the Federal Reserve 
banks by an agent of the United States Treasury. They are sent 
to the member banks by the Federal Reserve banks in return for 
deposits of commercial paper and are then put into circulation 
by the local, or member, banks. The Federal Reserve bank notes 
are issued to the Federal Reserve banks by the United States 
Treasury in return for deposits of government bonds, being in 
all essentials like the national bank notes, which they are in- 
tended to replace. 

Standard money. Among all these forms of money there is one 
which is known as standard money — that is, gold coin. The 



2 20 ELEMENTARY ECONOMICS 

value of the gold coin depends on the value of the material of 
which it is made. So long as the present policy of the government 
is maintained, the value of a gold coin will aways be the same as 
that of the metal which it contains. One reason for this is that 
the government will undertake to coin all the gold that is brought 
to the mint and to charge nothing for the work of coining except 
the value of the alloy which is put in. Since this alloy also has 
some value, this virtually means that if you bring to the mint 
not only the gold but also the other materials which go into the 
coin, in the proper ratio, the government simply does the work 
of coining free of charge ; you merely supply the raw material. 
When, therefore, there is even the slightest tendency for the value 
of coin to rise above that of bullion, men will anticipate this 
tendency by taking bullion to the mint. Since coin is easily melted 
down into bullion, if bullion showed the slightest tendency to ex- 
ceed coin in value, that would be anticipated by melting coin 
down into bullion. These two processes make it practically cer- 
tain that so long as the government can maintain its policy gold 
coin and bullion will be identical in value. 

Why not cheap money? The question has frequently been 
raised. Why use such expensive materials as gold and silver 
for money ? Would not some cheap substance, such as paper or 
aluminum, serve equally well ? Many long and heated controver- 
sies have been waged over this question. The so-called "hard- 
money" school have taken the position that the government 
cannot make money ; it can only stamp money. The stamp merely 
serves as a certificate of its weight and fineness ; the market itself 
must then determine its value. The "soft-money" school, on the 
contrary, have pointed to many historic instances in which cheap 
materials have actually served as money and circulated at a value 
which bore no relation to the value of the substance of which it 
was made. The truth seems to be summarized as follows : 

I. Long-established customs in a country — such, for example, as 
China, where custom rules supreme — may enable a kind of money 
to circulate at a customary value regardless of the commercial 
value of the material of which it is made. 



MONEY 221 

2. A government which is in the habit of using a great deal of 
compulsion over a people who are in the habit of submitting 
to authority and compulsion may by its own decree cause money 
to circulate at legally established rates without regard to the 
commercial value of the substance of which it is made. But a 
government which is not in the habit of exercising a great deal of 
compulsion, and a people who are not in the habit of submitting 
to it, have to rely mainly upon voluntary agreement among 
individuals in most of the relations of life. 

3. Where voluntary agreement rather than governrnxcnt com- 
pulsion is mainly depended upon, it has hitherto proved impossible 
to get people voluntarily to agree upon any substance as the mate- 
rial for standard money except something which had a value as 
raw material commensurate with its value as money. 

4. Cheaper substances may, however, be used in limited quan- 
tities as token money even in liberal countries where everything 
is done by voluntary agreement, under three sets of conditions: 
(i) when the government will give standard money in exchange 
for it — that is, redeem it in gold ; (2) when the government will 
accept it in payment of taxes and other dues to itself ; (3) in small 
quantities when the government exercises its authority by com- 
pelling a creditor to accept it in payment of a debt when offered 
by a debtor. 

Legal tender. The last is what is known as a legal-tender law. 
While it is an exercise of compulsion, it is one to which even liberal 
governments resort. It seems necessary in order to preserve the 
system of voluntary agreement among free citizens. 

EXERCISES 

1. In what sense is money a labor-saving device? 

2. Illustrate some of the inconveniences of barter. 

3. Name some of the things which have been used as money. 

4. What qualities are desirable in the material of which money 
is made? 

5. Why are gold and silver especially fitted to serve as the money 
material ? 



222 ELEMENTARY ECONOMICS 

6. In what sense is the value of gold stable and in "what sense 
is it not? 

7. Why does the value of gold change so little during short 
periods of time? 

8. Why is gold unsuitable for the making of five-cent pieces ? 

9. Name the principal kinds of coins in use in the United States. 

10. Name the principal kinds of paper money in use in the United 
States. Describe each kind. 

11. What is meant by standard money? 

12. Under what conditions can cheaper substances than gold or 
silver be used for money ? 

13. What is legal tender ? 

14. Which would be better, to bear the cost of the precious metals 
as the money material, or to encourage the government to exercise 
the authority, and the people the obedience, necessary to make cheaper 
substances circulate as standard money? 



CHAPTER XXV 
BANKING 

Promises to pay. Where business is done on the basis of volun- 
tary agreement among free citizens it is probable that many kinds 
of agreement will be made. Among these many forms there will 
probably be promises to pay money or to deliver some desirable 
object at some future time. In order that such promises may be 
accepted, one or both of two conditions must exist. First, and 
most important, the receiver of a promise may have confidence in 
the maker of the promise, both as to his honesty and his ability 
to fulfill his promise. Second, the receiver of the promise may have 
confidence in the power and the willingness of the government to 
compel the maker of the promise to keep it. Unless one or both of 
thesa forms o{. confidence should exist,, promises to pay are not 
likelyHQ h^ve mvcKValji^;(^i^t^^^ accepted widely. 

Need of insfeutions tQ deal "in promises to pay. In all coun- 
tries where confidence exists — that is, where men are generally 
honest and governments reasonably efficient — these promises come 
to play a large part *ih''f ree and voluntary exchange. The mass 
of such promises, and the habit of dealing in them, has come to 
be called the system of credit. The most common of these promises 
are promises to pay money. So common have they become, and 
there is so large a volume of them, that they call for special 
institutions or business establishments to deal in them. These 
establishments are now called banks. 

The business of a bank: receiving deposits. The original 
business of a bank was ostensibly to deal in money, but it has 
developed into a business of dealing in credit or promises to pay 
money. The way in which an ordinary commercial bank does this 
is very interesting and very simple. After the bank is once or- 
ganized and ready to do its real work, the first thing is to receive 

223 



224 ELEMENTARY ECONOMICS 

a deposit of money ; that is, some person leaves money in the bank, 
perhaps for safekeeping, and receives a certificate of deposit. 
This certificate is an acknowledgment that the person has de- 
posited the money and a virtual or implied promise to pay it back 
whenever the person wants it. The customer now has, not money, 
but the promise of the bank to pay money whenever he wants it. 

Making loans. The next thing the bank does is to make a loan 
to someone who wants money, receiving in return his promise to 
pay it back on a certain date. This may be a part of the money 
which the above-mentioned customer has deposited. 

When a bank has many depositors to whom it owes money, and 
many borrowers who owe it money, it is, if properly managed, a 
safe business for all concerned. The depositors to whom the bank 
owes money are not likely to want it all at once. All the bank 
has to do is to see that it has in its vaults every day a little more 
money than its depositors are at all likely to want on that day. 
When the bank is properly managed, its promises to its depositors 
are always good, and the depositors can always get their money 
when they want it. At the same time all the promises to pay 
which it has received from borrowers are always good, and the 
borrowers will pay back the money the day it is due. 

In order to understand how a depositor is safeguarded, it is 
necessary to go a little more into detail. In the case of a state 
bank, all the property of the bank is ultimately available for 
the payment of the depositors; that is, if the affairs of the bank 
are wound up, every depositor must be paid in full before the 
owners or shareholders get anything out of it. In the case of 
a national bank, the bank notes which it has issued take pre- 
cedence, but these are secured by special forms of property 
(such as government bonds and other securities) which it has 
deposited with the Federal Reserve Board. All the other prop- 
erty of the bank is then available, as in the case of the state 
banks, for the payment of the depositors. In addition to this, 
each shareholder may be assessed an amount equal to the par 
value of his shares in order to pay depositors. Thus the share- 
holders, or owners, may lose all that they originally put into 



BANKING 225 

the business plus an equal amount, before any depositor can 
lose anything. This makes the depositor relatively safe. 

Reserves. Let us now see in what the property of the bank 
consists. In the first place, there is what is called the reserve. 
This consists either in cash on hand or in part cash on 
hand and part deposits in the Federal Reserve Bank. This 
reserve is required to bear a certain ratio to the total cash 
obligations of the bank, and in normal times is always ample. It is 
obvious, however, that if an abnormally large number of depositors 
were to demand payment at the same time this reserve would be 
exhausted; that is to say, the bank would have no cash left. 
Unless the bank could get extra supplies of cash, depositors 
would then have to wait until some of the other property of the 
bank could be turned into cash. 

This other property, however, is mainly in the form of loans of 
various kinds, and would be ample unless there had been fraud or 
bad management. Since most of these are short-time loans, they are 
being paid from day to day, and cash is rapidly flowing in. Nor- 
mally this would replenish the cash reserve in a few days. In 
fact, the bank can usually call loans in rapidly enough to keep 
its cash from being exhausted even by an abnormal demand. 
In addition to these short-time loans, there are usually a few 
long-time loans and other securities. If these are exhausted 
and the affairs of the bank have to be wound up, the real estate 
and office fixtures may be sold. If these are not enough, the 
owners of the bank may be assessed, as indicated above, in order 
further to safeguard the depositors. In short, nothing except 
fraud or bad management could cause a depositor to lose any 
portion of his deposit. 

Making money more active. By looking carefully after these 
matters and by receiving many deposits and making many loans, 
the bank performs some very useful services for the community 
and the nation. One of these services is to take money which 
would otherwise have remained inactive and put it to work. The 
individual who has a fund of money which he does not care to 
use right away may deposit it with a banker ; someone else who 



226 ELEMENTARY ECONOMICS 

needs money right away may go to the banker and borrow it. 
The banker is therefore the middleman who brings together the 
one who has money to spare for which he has no immediate need 
and the one who has a productive use for money which he does 
not possess. Without the banker these two men might have diffi- 
culty in finding each other. The banker at least saves them time 
and trouble. 

Kinds of deposits. The methods by which a bank deals in 
promises to pay are by receiving deposits and making loans. 
These are the essential functions of all banks, but there are 
different kinds of deposits and different kinds of loans. The 
principal classes of deposits are time deposits and deposits sub- 
ject to check. The depositor may prefer to leave his money on 
deposit for a long or a stated time, or he may prefer to deposit 
it on condition that he may withdraw it any day when it suits 
his convenience to do so. The former class of deposits are com- 
monly called savings deposits, and the latter, deposits subject to 
check. The savings banks are a special class which receive savings 
deposits, whereas the ordinary commercial banks receive deposits 
subject to check, though many commercial banks have savings 
departments, thus meeting the needs of both classes of depositors. 

Loans. The commercial bank whose depositors desire the 
privilege of withdrawing their deposits at any time, without 
previous notice, must necessarily follow a somewhat different 
policy with respect to its loans from that which savings banks 
may follow. The loans of the commercial bank are mainly 
short-time loans, seldom more than ninety days, while the savings 
banks may lend for longer time or invest largely in mortgages or 
other long-time securities. 

National and state banks. National banks in this country are 
commercial banks that operate under national law. State banks 
operate under state law. Their functions are the same except that 
national banks are permitted to issue bank notes while state banks 
are not. 

Trust companies. Trust companies were originally formed, 
as their name implies, to act as trustees; that is, they would 



BANKING 227 

take care of valuable papers, such as mortgages and other se- 
curities, collect interest on them, pay obligations when due, 
execute wills and bequests, handle estates for people who needed 
or desired to be relieved of the work, and perform a great many 
other similar tasks. In the course of this work they naturally had 
to handle a great deal of money. At one time they kept this 
money in regular banks, but in recent times they have generally 
kept it in their own vaults or have loaned a part of it on ordinary 
commercial loans. This means that they have been doing a regu- 
lar banking business in addition to the business of a trust com- 
pany as originally conceived. In fact, it is not, at the present 
moment, easy to distinguish a trust company from any other 
commercial bank. 

Origin of the bank check. Originally, when a depositor who 
had money in a bank wished to make a payment to another person, 
it was necessary for the depositor to withdraw his money from 
deposit and hand it to the other person. A little later the custom 
grew of going in person to the bank and authorizing the bank to 
transfer a certain sum from the payer^s to the payee's account. 
The payee could then draw out the money as he needed it. From 
this it was an easy step to the custom of giving the bank a written 
order to pay a certain sum to another person. This written order 
became known as a bank check. These checks proved so con- 
venient that they have become one of the principal means of 
making payments. A bank draft is merely a check on one bank 
drawn by another bank. A certified check is a private check which 
the bank on which it is drawn certifies or the payment of which it 
guarantees. 

Bank checks do not circulate quite so freely among private 
individuals as money, because each ch^ck must be indorsed by 
each person through whose hands it passes. Therefore a check 
will be accepted only from a person whose signature is known to 
be genuine. Since, however, paper money circulates without in- 
dorsement, one will accept it from a stranger or a known rogue 
unless one has reasons for suspecting the money to be counterfeit 
or to have been stolen. 



2 28 ELEMENTARY ECONOMICS 

The clearing house. The vast increase in the use of bank 
checks in the making of payments created, long ago, the necessity 
for a special institution known as the clearing house. At the close 
of each day's business every bank in a large city finds itself in 
possession of a number of checks on each of the other banks. 
Originally messengers were sent the rounds, carrying bundles of 
checks — a cumbersome and an expensive process. 

From this it was an easy transition to the organization of a 
regular clearing house to which all those checks were sent. This 
eventually became the heart of the whole financial district. Most 
of the bank clearings in this country are now done through the 
Federal Reserve banks. The clearing house is essentially a bankers 
bank, where banks make their payments to and collect their obli- 
gations from one another very much as private individuals who do 
business with the same bank make their payments to and collect 
their obligations from one another. The Federal Reserve banks are 
now in a peculiar sense fitted to act as the bank for the member 
.. banks, thus taking the place of the old-fashioned clearing house. 
X, Domestic and foreign exchange. This habit of making pay- 
ments by means of bank checks has extended beyond the limits 
of any city or of any country. Business transactions between 
cities and between countries are carried on in much the same way. 
This necessitates some convenient way of balancing payments 
from one city to another and from one country to another. 
The one method is known as domestic and the other as foreign 
exchange. If a man in one city, say Chicago, must pay for 
goods which he has bought in New York, and another man in 
Chicago is to receive an equal amount of money for goods which 
he has sold to someone in New York, it would be much simpler for 
the first man to pay the second man, thus canceling both debts, 
than for money to be sent both ways. Domestic exchange is 
merely a system on which this can be done on a large scale 
between all the large cities. If the men in question live in differ- 
ent countries as well as in different cities, the same problem 
arises and is complicated by the difference in the monetary sys- 
tems of the different countries. 



BANKING 229 

It will frequently happen that, for a time, more money is 
owed by citizens of one country, say the United States, to citi- 
zens of another, say England, than is owed by citizens of Eng- 
land to those of the United States. In such cases the debts do 
not exactly cancel one another. If Americans owe more to 
Englishmen than Englishmen to Americans, there is said to be 
an unfavorable balance of trade in America and a favorable one 
in England ; that is, some money must flow from America to 
England to pay the balance, and in the opposite direction if 
the balance of trade is unfavorable to England and favorable 
to the United States. Rather than send money to England, 
when the balance is against us, paying the cost of transportation 
and losing the use of it for a time, those Americans who owe the 
money will try to find others who have money coming to them 
from England, and will even offer a small premium for bills on 
England. English, or sterling, exchange is then said to be above 
par ; that is, the American who is to receive an English pound can 
sell his claim for a little more than $4.8665, which is its par value 
in American money. When the balance is the other way, sterling 
exchange is below par ; that is, the man who has to wait and get 
his money from England will sell his claim for a little less than 
$4.8665 for each pound sterling. During the World War the Eng- 
lish people had nothing to sell to us and much to buy from us. 
The balance was so overwhelmingly against them as to exhaust 
all their available gold, and they could not make any payments at 
all for a long time. The pound sterling naturally fell far below 
par, as it must in all such cases, depending on the probable lapse 
of time before trade can again reach a normal balance. 

Dealers in foreign exchange are merely middlemen who buy 
and sell these obligations between countries. The man who has 
money coming to him from another country does not have to find 
a man who owes the same amount to the other country, he merely 
sells his claim to one of these dealers. Similarly the man who 
owes money to another country does not have to find a man who 
has the same amount coming to him from the same country. He 
merely goes to one of these dealers and buys a claim to cancel his 



230 ELEMENTARY ECONOMICS 

own obligation. It is largely through these dealers in foreign 
exchange that international payments are made with very few 
shipments of money. 

Bank notes. Certain banks, such as national banks, have been 
permitted to perform the special function of issuing bank notes 
and thus providing a circulating medium which answers the pur- 
pose of money if it is not itself a form of money. They differ 
from the notes of an ordinary individual in that they pass from 
hand to hand without indorsement. 

The national banking system. In 1863 the foundation of 
our present national banking system was laid, and a series of 
national banks was created, partly as a means of making a market 
for the bonds which the Federal government wasf offering for sale 
in order to get money with which to carry on the Civil War. Any 
bank chartered under this act was permitted to deposit bonds of 
the United States with the Secretary of the Treasury, and in return 
for these deposits it was permitted to circulate bank notes up to 
90 per cent of the value of the bonds deposited. Thus, if a bank 
failed, the government had possession of enough of the bank's prop- 
erty to redeem all the notes which it had issued. In a sense the 
bank had pawned valuable property (that is, government bonds) 
and received a kind of pawn check in return. These ^^ checks," 
called bank notes, it was permitted to circulate. This is essen- 
tially the characteristic of our bank notes at the present day. 
Subsequent acts have made some changes in the system, particu- 
larly the act of 1908, which permits a national bank to deposit 
certain other securities besides United States bonds as a basis for 
its note circulation. 

The Federal Reserve system. The most important piece of 
banking legislation in this country since the National Bank Act 
of 1863 was the Federal Reserve Act of 19 13. Under this act 
there was created under the Treasury Department of the United 
States a Federal Reserve Board consisting of five members, besides 
the Secretary of the Treasury and the Comptroller of the Currency. 
This board was charged with the general administration of the 
national banking system. 



BANKING 231 

The country was then divided into twelve districts, and within 
each district a city was selected to be called a Federal Reserve 
city. The cities chosen were Boston, New York, Philadelphia, 
Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, 
Kansas City, Dallas, and San Francisco. In each of these cities 
was organized a Federal Reserve bank. This bank was to be the 
central bank of the Federal Reserve system in the district within 
which it was located. 

All the national banks, and all the state banks which wished to 
become national banks, by coming in under the Federal Reserve 
system were to become member banks and in a sense tributary to 
the Federal Reserve bank. The Federal Reserve bank thus be- 
comes, in a sense, the bank of the member banks of its own dis- 
trict. It does no business directly with private individuals, aside 
from the purchase of bills of exchange in the open market. The 
Federal Reserve banks themselves carry on their clearing through 
a special branch of the Federal Reserve Board in Washington. 
This may be called the bank of the Federal Reserve banks. 

Agricultural credit. The business of agriculture has been the 
slowest of all to make a large use of credit. One reason has been 
that there has been no machinery designed to provide the farmers 
with the kind of credit which they have needed, as the ordinary 
banks have provided the merchants and manufacturers with the 
kind which they have needed. The farmer needs comparatively 
little short-time credit, as the merchant and manufacturer under- 
stand that term. The bank which does a regular check and deposit 
business, whose deposits are continually being withdrawn and re- 
plenished, must keep its assets in liquid form. Farm mortgages 
are notoriously hard to dispose of, and no commercial bank would 
feel safe if it loaned a large proportion of its deposits out on that 
kind of security. 

Even what the farmer calls short-time credit is too long for the 
average bank. The farmer can seldom use credit for less than 
three months, and he is more likely to need it for six, nine, or 
twelve months, whereas the city borrowers generally borrow for 
shorter periods, such as thirty, sixty, or ninety days. 



232 



ELEMENTARY ECONOMICS 



The farmer's chief need, however, is for long-time, or mortgage, 
credit rather than for short-time, or personal, credit. In the 
purchase of a farm, in the making of durable improvements, or 
even in the stocking or equipping of the farm, considerable sums 
of money are required. If he borrows for these purposes he can 
scarcely hope to pay off his debt inside of a term of years. The 
mortgage is the only satisfactory form of security in cases of 
this kind. 

A very important development of our banking system, designed 
to extend credit facilities to the farmers of the country, was begun 
by the act of 191 6, inaugurating our Farm Land Bank system. The 




|Far.mi;h| |Farmek| | Farmer] [FarmerI [Fa 



general organization of this system resembled that of the Federal 
Reserve system. It is presided over by a central body known as 
the Federal Farm Loan Board. The country was divided into 
twelve districts, and in each district a city was selected as a head- 
quarters for the Farm Land Bank. The Farm Land Bank was to 
operate throughout its own district in the organization of local 
Farm Loan Associations. 

Each Farm Loan Association is to be an association of farm 
owners, or those about to become owners, who desire to borrow 
money by giving a mortgage as security. The individual farmer 
is to deal only with his local association. A group of farmers form 
themselves, according to specified rules and plans, into a Farm 
Loan Association. Each one who wishes to borrow money gives a 
mortgage on his farm to the association. The association then in- 
dorses the mortgages received from its own members and sends 
them to the Farm Land Bank of the district. The Farm Land 



BANKING 



233 



Bank then advances the money to the Farm Loan Association, and 
the association in turn advances the money to each of the farmers. 

When the Farm Land Bank has a sufficient number of mort- 
gages transferred to it in this way, it may deposit these mortgages 
with a custodian appointed by the Farm Loan Board, and it is 
then empowered to issue bonds to an equal amount and offer these 
bonds for sale to the general investing public. With the money 
received when it sells these bonds it may buy more mortgages 
from the local Farm Loan Associations within the district. On the 
basis of these new mortgages it may issue more bonds, and so on, 
till its outstanding bonds equal twenty times the capital of the 
Farm Land Bank. 

The whole system is — like every other banking system — or- 
ganized to deal especially in promises. The farmer who wants 
money gives in exchange for the money a written promise to pay 
it back, together with a low rate of interest. This written promise 
is transferred from the Farm Loan Association to the Farm Loan 
Bank and then to a custodian, who keeps it safely until it is 
redeemed. The Farm Land Bank, in order to raise money to buy 
the farmers' promises, issues promises of its own, called Farm 
Land Bonds, which promise to pay money and a low rate of in- 
terest to the holders. These promises, or bonds, are then sold for 
money to whomsoever will buy. This money is then used to buy 
other promises of other farmers or, as it is more commonly stated, 
to lend to other farmers on their promises to pay it back. 

If men are permitted to work together on the basis of voluntary 
agreement, they will be pretty certain to see the advantages of 
doing a good deal of trading among themselves. It will sometimes 
happen that a man will want something at once and not have any- 
thing to give in exchange for it. If he is likely to have something 
in the future which could be given in exchange, he will have the 
problem of bridging that interval of time ; that is, of getting at 
once what he wants and paying for it later. The seller is likely 
to want a pretty definite promise. If this promise is written down, 
then the man who receives it has something that can be transferred 
to another. Where there are many such promises in existence. 



234 ELEMENTARY ECONOMICS 

there is likely to be a good deal of exchanging. When these 
promises become not only numerous but of many different kinds, 
the business of dealing in them becomes a large and complicated 
business. It is known as banking. 

EXERCISES 

1. Under what conditions are promises generally accepted? 

2. What is the business of a bank ? 

3. How does a bank get most of the money which it lends? 

4. What does a bank do with most of the money which is 
deposited in it? 

5. What service does the bank perform? 

6. What is a savings deposit ? 

7. What is the use of a bank check? 

8. What is a clearing house? * 

9. What is a bank note? I 

10. When did the National Banking system of the United States 
originate ? 

11. When did the Federal Reserve system originate? Describe it 
in general outline. 

12. Describe the Federal Farm Loan system. 

13. In what kinds of promises does it deal? 



CHAPTER XXVI 
COMMERCIAL CRISES 

Confidence and stability. In the last chapter it was shown that 
promises to pay have come to play a very important part in our 
system of exchange. In fact, a large part of the business of the 
country is carried on by means of these promises to pay. Instead 
of paying cash at the time of a purchase, the buyer pays, first, 
with a promise; afterwards, with the thing — say money — which 
was promised. 

It was further shown that this system of dealing in promises 
depends upon confidence. Let confidence be destroyed and no one 
would accept these promises. Then the would-be buyer could not . 
buy until he could raise the cash. But if buyers postpone buying, 
sellers must necessarily postpone selling. This means that business 
necessarily slows down. 

It was also shown that the system of dealing in promises to 
pay becomes highly complex in our banking system, where one 
set of promises to pay is balanced against another set. If those 
who borrow from the bank should fail to pay their notes, the 
bank would be unable to pay its depositors. These depositors, in 
turn, might be unable to pay the people to whom they owe money. 
This is only one phase of our interlocking system of credits. Under 
this system the failure of even a few men to fulfill their promises 
may destroy, temporarily at least, the whole credit system and 
cause widespread failure and bankruptcy. 

Financial crises. The system of credits gives rise to one of the 
most important and most puzzling of all modern economic ques- 
tions, namely, that of the frequent recurrence of financial crises 
and general industrial depressions. A financial crisis is an occasion 
when the money market becomes suddenly demoralized, confidence 
disappears, and credit shrinks. Everyone to whom money is owed 

235 



236 ELEMENTARY ECONOMICS 

wants it at once, but no one wants to let go of any money in his 
possession, for fear that he may not be able to get any more. 
Besides, there does not seem to be money enough to pay off 
existing debts. 

If you will imagine a group of men doing business with one 
another, where each one trusts every other, you will see that a 
large amount of business can be done with a ridiculously small 
amount of money. Many transactions will be carried on by means 
of promises to pay money instead of with the money itself. Many 
of these promises will be balanced against one another and canceled 
without the use of any money at all. In other cases the money 
will be used merely to pay balances. But if something should hap- 
pen to destroy confidence, so that no one would accept promises, 
but everyone demanded real money, there might not be money 
enough to go around and make the necessary payments. In that 
case business would have to slow down, and only as much business 
would be done as could be done with the small amount of money 
available. If, in addition to this, everyone held on to all the 
money he could lay hands on, for fear that he might not be able 
to get any more, even the limited amount of money in circulation 
would move slowly, and business would have to slow down still 
more. A swift dollar may pass from hand to hand many times in 
a day, and in this case it will do a large amount of business ; but 
a slow dollar passes from hand to hand only a few times a day and 
does a small amount of business. 

Industrial depression. An industrial depression is usually more 
deep-seated than a financial crisis and usually lasts, for a longer 
time. It is a general slowing down of production because of an 
inability to sell goods or to get satisfactory prices for them. 

Various explanations, some intelligent and some absurd, have 
been offered to account for these depressions. Overproduction is 
one of the most common and least intelligent. There may be such 
a thing as disproportionate production, but such a thing as general 
overproduction is a logical impossibility. The production and 
supplying of one thing is a demand for something else ; the more 
production, the more demand. But if some things are produced 



COMMERCIAL CRISES 237 

and offered for sale, and there is no demand for them, it may mean 
either that those few things are overproduced or that the other 
things which might be exchanged for them are underproduced. 
In either case it is disproportionate production. 

The overproduction theory. One phase of the overproduction 
theory of industrial depression is that wages are so low that the 
laborer is not able to buy his own products. It is argued that this 
results in an overproduction and glut on the market. 

There are many excellent reasons why wages should be higher 
than they are, but this is not one of them. So far as its effect on 
the general purchasing power of the community is concerned, it 
makes no difference whether wages are high and rent, interest, 
and profits are low, or whether wages are low and rent, interest, 
and profits are high. If the laborer gets a small share of the pro- 
duction of a given industry, and the managers, landowners, and 
capitalists get a large share, these have large purchasing power 
and the laborer small purchasing power. 

The value of the whole product of every industry goes to these 
various classes, and they have it all to spend. If one class pos- 
sesses a large share, and another class a small share, the total 
amount to be spent for other commodities is not affected by that 
distribution. If the laborers get absolutely the whole product of 
an industry, there will be no more to spend on other products than 
if the laborers get one half the product and the other participants 
get the other half. This, let it be repeated, has nothing to do with 
other and excellent reasons why wages should be high. 

The periodicity theory. A certain periodicity has been ob- 
served in the recurrence of crises and depressions. It is not always 
easy to determine just the interval that elapses between depres- 
sions. Sometimes they come approximately twenty years apart, 
but they have a disconcerting habit of coming at unexpected times. 
In his book on " Economic Crises," Jones gives the table on the 
following page: ^ 

1 Edward D. Jones, Economic Crises. The Macmillan Company, New 
York, 1900. 



238 



ELEMENTARY ECONOMICS 
LIST OF ECONOMIC CRISES 



United 
States 


England 


France 


United 
States 


England 


France 




1792-1793 




1847 


1847 


1847 




1796 








1855 






1804 


1857 


1857 


1857 




1810-1811 






1866 




l8l2 






1869 










1813 


1873 


1873 


1873 




1815 








1882 


1818 




1818 


1884 




1884-1885 


1825 


1825 


1825 


1890 


1890 


1890 






1830 


1893 




1893 


1837-1839 


1836-1839 


1836-1839 









In the nineteenth century it will be noticed that there were 
severe crises in 1818, 1837, 1857, with lesser crises in 1825 and 
1847. The severe crises seemed to come every twenty years for 
almost half a century. Again, there were severe crises in 1873 
and 1893, with a less severe one in 1884. Another one occurred 
in 1907. 

Various attempts have been made to explain this apparent 
periodicity. The late William Stanley Jevons developed an in- 
teresting theory of the coordination between sun-spot cycles and 
industrial depressions. The sun-spot cycles, he argued, had a 
profound effect on the weather, rainfall, etc., and these in turn 
affected the agricultural basis of the world's wealth. This theory, 
however, had not been taken seriously by the economists until 
it was recently revived by the interesting observations of Professor 
Ellsworth Huntington. It is true he has not developed the theory 
at great length as applied to economic crises, but he has presented 
strong evidence in favor of the doctrine that solar disturbances 
profoundly affect climatic conditions and rainfall, and these in 
turn have produced great historical and economic disturbances.^ 

1 Ellsworth Huntington, " Climatic Changes and Agricultural Exhaustion 
as Elements in the Fall of Rome," Quarterly Journal of Economics^ February, 
1917. See also " The Pulse of Asia," Houghton Mifflin Company, Boston, 1907. 



COMMERCIAL CRISES 239 

The overspeculation theory. There is a persistent belief 
among all students of the question that overspeculation has some- 
thing to do with depressions. When a fever of speculation takes 
possession of a community, the prices paid for the articles in which 
people are speculating do not bear any logical relation to their 
real values. The speculator will pay any price for anything, pro- 
vided he thinks he can sell it later at a still higher price. When 
prices are tending rapidly upward he may rely on the mere 
momentum to carry them higher. There is only one possible out- 
come of this tendency — a rapid fall in the prices of the com- 
modities in which men are speculating. 

Even though the speculation takes place in a single article, it 
may produce a profound economic disturbance. The money that 
is absorbed in the speculative purchasing of the article in question 
is necessarily withdrawn from other kinds of business. This in 
itself produces some disturbance. When a fall in prices begins, a 
general bankruptcy among the speculators takes place. When a 
number of men become bankrupt and are unable to pay their 
obligations, a process begins which may be compared to knocking 
over one brick in a row of bricks standing close together. If one 
individual who owes money to another fails to pay his debt, the 
latter, not being able to collect his money, fails to pay his ob- 
ligations to a third, and so on; one after another fails, and the 
bankruptcy spreads throughout the community in a sort of wave 
motion. 

The real-estate boom. The wave of speculation in land which 
is known as a real-estate boom is one of the most interesting and 
instructive of all subjects of economic study. No one has ever 
been able to explain just how it starts ; but after it has started, 
it is not so difficult to understand. Something happens, let us say, 
such as the building of a new railroad, the opening of a new mine, 
or the location of a new factory, to produce a very rapid rise in 
the price of city lots. Men double and quadruple their money 
in a short time by merely buying and selling again at a higher 
price. This sets them and others crazy. Everyone wants to buy 
lots for the purpose of selling again. The first effect is to increase 



240 ELEMENTARY ECONOMICS 

greatly the number of buyers, and the effect of this is to send the 
prices still higher. These buyers, as a consequence, also make 
money rapidly. This attracts still other buyers, some of them 
coming from long distances to share in the harvest. So long as 
buyers are increasing faster than sellers, prices continue to go up ; 
but when the buyers become less numerous than the sellers, which 
must inevitably happen, prices begin to fall. Suddenly everyone 
becomes a seller, and there are no buyers at all. Stagnation, de- 
pression, bankruptcy, and general ruin ensue. 

The recovery is very slow. The men who are left with land on 
their hands are not fitted to use it. They did not want it for use ; 
they wanted it only to sell. This means an inefficient use of the 
land. Besides, even those owners who are fitted to put the land 
to an economic use are handicapped because they put too much 
money into the land and have too little with which to develop or 
use it. Those who were lucky enough to sell out in good time are 
very careful not to let go of their money or to invest it in pro- 
ductive industry. Years usually elapse before the city recovers 
from the disaster. 

The overinvestment theory means merely that there has been 
overinvestment in certain industries, thus producing an unbalanced 
industrial system. It should, strictly, be called disproportionate 
investment rather than overinvestment. 

Investment should always be carefully distinguished from specu- 
lation. The speculator buys merely to sell again at a higher 
price, without performing even the mercantile function of saving 
the time of producers and consumers. The investor buys pro- 
ducers' goods or durable consumers' goods with the idea of using 
them himself or of keeping them as a source of income. 

Overinvestment in the railroads of the Far West is supposed to 
have had something to do with the panic of 1857. The railroads 
were built, the money was spent on their construction, and then 
it began to appear that it would be some years before there would 
be business enough to put the railroads on a paying basis. Mean- 
while all that capital had been diverted from other industries, 
which suffered in consequence. In many cases, however, the shares 

1 . 



COMMERCIAL CRISES 241 

of the new railroad enterprises had been bought on credit. As 
soon as it appeared that dividends were not to be speedily forth- 
coming, the value of the shares fell rapidly, and those who had 
invested on credit in many cases suffered bankruptcy. 

There is something also in the very nature of modern industry 
which seems to render it highly sensitive. The countries which 
show the largest amount of enterprise and the adventuring spirit 
not only expand most rapidly but also, at the same time, seem to 
have the largest number of industrial depressions. The tendency 
to rush headlong into new enterprises is doubtless an important 
factor in national expansion, but it also produces a severe reaction 
when this headlong spirit rushes too far in a given directioh. 

A special phase of the overinvestment theory is found in the 
growing importance of the investors' market as distinguished from 
the consumers' market. There are fundamental reasons why there 
should be violent fluctuations of the value of producers' goods on 
the investors' market. 

Let us begin by noticing a few elementary facts. Every farmer 
knows that a horse which will not earn more than his feed, or a 
piece of land which will not produce more than it costs to culti- 
vate it, is of no value. Likewise every business man knows that 
an establishment that cannot be made to pay more than running 
expenses is worth nothing except as junk. 

This is equivalent to saying that the value of such an establish- 
ment — or, indeed, of any productive agent — is determined not 
by the total value of its product but by the excess of that total 
value over and above the running expenses. When the running 
expenses are high and the output large, so that the earnings de- 
pend upon small profits and large sales, a very slight rise in the 
value of the product may double or more than double the value 
of the establishment, provided, of course, that the rise in value 
is believed to be permanent. 

Let us suppose that a certain shoe factory can be made to turn 
out 100,000 pairs of shoes in a year at a uniform cost of $5 a pair. 
If these shoes cannot be sold at more than $5 a pair, the plant 
is worthless ; but if they can be sold at 1 5. 2 5 a pair, the earnings 



242 ELEMENTARY ECONOMICS 

of the plant will be $25,000, which, capitalized at 5 per cent, will 
make the plant worth $500,000. If, however, the price of shoes 
should rise to $5.50, the earnings of the plant would be doubled ; 
and if this rise in value were believed to be permanent, the value 
of the plant would be doubled. Thus an increase of only one 
twentieth in the value of the product would double the value of the 
plant. In the same way, a subsequent fall of one twentieth in the 
value of the product would reduce the value of the plant by one 
half, while a fall of one tenth in the value of the product would 
destroy the value of the plant altogether. 

This may be stated as a general law to the effect that a slight 
fluctuation in the value of a product tends to produce a violent 
fluctuation in the value of the establishment producing it. Stated 
in still more general terms, the value of producers' goods tends to 
fluctuate more violently than the value of consumers' goods. 

Most of these causes of commercial crises and industrial depres- 
sions are difficult to cure by any kind of legislation. So long as 
men are free to buy and sell as they like, there will be the possi- 
bility of unwise buying and selling. Until men become wise enough 
to buy and sell wisely, there may be a good deal of bankruptcy. 
When a craze of unwise buying and selling takes place, it is likely 
to be followed by wholesale bankruptcy, the loss of confidence, the 
slowing down of business, and general hard times. Possibly the 
government may curb certain kinds of speculation, but there are 
so many possible kinds as to cause one to doubt whether attempted 
suppression can have a great deal of influence or not. The general 
spread of business intelligence, the habit of careful and farsighted 
buying and selling, and the gradual decline of the gambling spirit 
in business will probably do more than legislation. 

EXERCISES 

1. What effect does a sudden lack of confidence have upon 
business ? 

2. What is meant by a financial crisis ? 

3. What is meant by an industrial depression? 

4. Can there be such a thing as general overproduction? 



COMMERCIAL CRISES 243 

6. What is meant by disproportionate production? 

6. What is meant by the periodicity of industrial depressions ? 

7. When did the principal industrial depressions occur in this 
country ? 

8. What is meant by the overspeculation theory? 

9. Describe the progress and the end of a real-estate boom. 

10. What is meant by the overinvestment theory? 

11. Why does the investors' market fluctuate more than the 
consumers' market? 



CHAPTER XXVII 
INTERNATIONAL TRADE 

Advantages of exchange among individuals of the same 
country. Freedom of exchange between individuals is so clearly 
advantageous that practically no one advocates serious restrictions 
upon it. Freedom of trade between different sections of the same 
country is also generally approved. It would seem absurd for 
the South, which is peculiarly adapted to cotton growing, to try 
to be entirely self-supporting, and especially to produce certain 
things, such as wheat, for which its soil and climate are not so 
well suited as are those of other sections of the country. No one 
would advocate seriously an interference with the shipments of 
wheat and wheat flour to the South or of cotton to the North. 

Advantages of exchange among individuals of different 
countries. It is held by a large majority of the students of 
economics that the same arguments which favor a policy of 
freedom of exchange within the country are equally strong in 
favor of freedom of exchange between different countries. 

The diversion of labor and capital from the more productive 
into the less productive industries. The positive argument in 
favor of freedom of international trade rests upon one or two 
fundamental propositions. One of. these is that the labor and capi- 
tal of any region will tend of themselves to seek those opportu- 
nities and to develop those industries which are most profitable. 
From this ft would follow that any interference with this process, 
or any attempt to develop an industry in a region where it would 
not develop without special favors, must necessarily be a mistake. 
It would merely divert labor and capital from a more productive 
to a less productive industry. 

Against this fundamental proposition of the free-trade school the 
protectionists have never been able to launch a successful frontal 
attack. 

244 



INTERNATIONAL TRADE 245 

There are, however, six popular arguments in favor of protection, 
besides some others that are not so popular, though perhaps of 
greater scientific weight. These six popular arguments may be 
characterized as follows : ( i ) the balance-of-trade argument ; 
(2) the home-market argument; (3) the infant-industries argu- 
ment; (4) the standard-of-living argument ; (5) the anti-dumping 
argument; and (6) the necessity- for-military-supplies argument. 

The balance-of-trade argument. By the balance-of-trade argu- 
ment is meant the old theor}^ that a nation is rich when it sells 
abroad more than it buys. There is a certain superficial analogy 
between the condition of the private individual and that of the 
nation. It look at first thought as though the private individual 
who was selling more than he was buying was getting rich. This, 
however, is only an appearance. It is true that so long as he is 
selling more than he is buying he is accumulating money, but 
unless he sooner or later invests that money it will do him no 
good. The individual who accumulates money for a time, say 
for a year, is accumulating the power to purchase something 
else at a later time ; but suppose that during the next year he 
invests all the accumulations of the preceding year, then it will 
happen that during this next year he will be buying more 
than he will be selling. No one will argue that he grows poorer 
by the process. 

Similarly with the nation that continually sells more than it 
buys, — if it never buys anything from the outside with that 
money, the money is of no use to it ; if it merely keeps it in cir- 
culation within its own boundaries, it will have more money in 
circulation, but no more goods. 

Nothing could be more elementary or more incontrovertible 
than that every country must in the long run pay for its foreign 
supplies with its own products. If it happens to produce gold 
and silver in large quantities, these of course must be reckoned 
among its own products, and it may pay for a portion of its 
foreign supplies with this gold and silver. In the long run, there- 
fore, the country that restricts importation must necessarily, and 
in exactly the same degree, restrict exportation. 



246 ELEMENTARY ECONOMICS 

The home-market argument. The home-market argument 
has been peculiarly effective with farmers. It has been pointed 
out to them that unless factories are built up in their own 
neighborhood, they must depend upon distant markets for the sale 
of their products. To sell their products in these distant markets 
and get their own supplies back, it is said, involves heavy expenses 
in the form of freight rates. If these expenses, however, were so 
heavy as to overbalance the other advantages and disadvantages 
involved, manufacturing would be developed in the home market 
without any government aid or interference. If, for example, the 
difference in the cost of growing wheat in Alabama and North 
Dakota were less than the freight rates from North Dakota to 
Alabama, Alabama would find it advantageous, without any gov- 
ernment help, to grow her own wheat ; but if it costs, let us say, 
twenty cents more per bushel to grow wheat in Alabama than 
in North Dakota, and the freight rate is only ten cents, then it 
would be more profitable to import wheat or wheat flour from 
North Dakota. 

The infant-industries argument. As to the infant-industries 
argument, there is undoubtedly something to be said on the side 
of protection. The argument is good, however, only on condition 
that the infant industry, after it is once established and ceases to 
be an infant, is able to take care of itself without further protec- 
tion. If it is not, and if it continually needs protection, it becomes 
not a policy for the protection of infant industries but a policy for 
the protection of those that are in a state of senile decay. It is a 
policy for keeping alive industries that ought to be dead. 

There is another rather fundamental objection to a protective 
policy based on the infant-industries argument. No matter how 
much protection is given to any industry, there; will always be 
certain establishments that are just on the margin of bankruptcy. 
There will be men who are so poorly qualified for managing a 
business, or who have located their businesses in such disadvan- 
tageous places, that they have to compete with more productive 
industries for their labor and supplies, and are thus barely able to 
keep going. Any attempt to double and treble the amount of 



INTERNATIONAL TRADE 247 

protection merely calls into existence business establishments run 
by less qualified managers or located in less advantageous posi- 
tions, so that with respect to business establishments it becomes a 
truism that " the poor ye have always with you." Conversely, any 
attempt to take away or reduce the amount of protection will 
necessarily mean bankruptcy to those marginal establishments. 
They can always bring pressure to bear upon Congress and can 
always show convincingly that they would be ruined if protection 
were taken away. Thus the infant-industries argument sooner or 
later inevitably becomes an argument in behalf of the inefficient 
producer. 

The standard-of-living argument. By the standard-of-living 
argument is meant the argument that since American laborers get 
higher wages and maintain a higher and more expensive standard 
of living than most foreign laborers, it is necessary to compensate 
the manufacturer for these higher wages by enabling him to get 
somewhat higher prices for his product. From the free-trader's 
point of view this looks like putting the cart before the horse. 
The reason why wages are higher in one country than in another 
is because labor is more productive in the one than in the other. 
If labor is more productive the laborer creates the product out of 
which his higher wages are to be paid. We have had such an 
abundance of natural resources and, on the whole, compared with 
old and overcrowded countries, such a dearth of labor that the 
marginal productivity of labor has been high in this country. 
The unprotected industries pay these wages as well as the pro- 
tected. Therefore it would be a mistake to tax the more produc- 
tive industries in order to allow a bounty or a higher price to the 
less productive industry. 

The anti-dumping argument. As to the anti-dumping argu- 
ment, there is a certain justification for it. By the anti-dumping 
argument is meant the argument that an old and well-established 
industry may, whenever it finds itself with a surplus product which 
is difficult to sell in its own country, offer it for sale in a foreign 
country far below the cost of production ; or, as the argument is 
put in the country where protection is advocated, the foreign 



248 ELEMENTARY ECONOMICS 

producer may dump his surplus onto our markets and demoralize 
the business of production here. 

In so far as this dumping policy is temporary and spasmodic, 
there is a good deal to be said in favor of a policy which will 
restrict it. If, for example, a group of foreign manufacturers were 
to dispose of a temporary surplus in this country far below the 
cost of production, and keep it up spasmodically for a few years, 
it might cause bankruptcy among our own producers and dis- 
courage others from entering the business. As a result we might 
find ourselves in a short time with no industry of our own in that 
field. Then the foreign producers would no longer need to dump 
their surplus onto us, but could charge us a good high price. 

On the other hand, if the policy of dumping a surplus product 
onto us is a permanent one, there is everything to be said in favor 
of allowing it to go on and allowing the home industry to die 
out. It merely enables us to get permanently a product much 
cheaper than we could produce it ourselves. The labor and capital 
which would otherwise be engaged in this industry would now 
better be engaged in some other. 

The military-defense argument. So long as war is a possibil- 
ity the necessity for military defense will remain with us ; and so 
long as we must be prepared for military defense the argument 
in favor of producing certain essential military supplies at home, 
even at greater cost than they could be produced abroad, will be 
overwhelming. It is obvious that at the very time when we need 
military supplies most — in time of war — we may not be able to 
get them at all if we depend upon foreign sources. This would 
apply not only to military supplies in the technical sense, such as 
guns and ammunitions, but also to every article which is indis- 
pensable in time of war. It might easily happen that a nation 
would fail in its military operations by reason of a lack of some 
single military article like nitrogen or copper, and suffer a national 
disaster and humiliation in consequence. Until we can be reason- 
ably certain that war has been permanently eliminated, the argu- 
ment for government encouragement of the production of every 
indispensable military article is overwhelming. 



INTERNATIONAL TRADE 249 

EXERCISES 

1. If it is advantageous to permit near neighbors to exchange 
products, why is it not advantageous to permit distant neighbors to 
do the same if they care to do so? 

2. If two individuals who Hve in the same country find it to their 
mutual advantage to trade in legitimate commodities, should they be 
forbidden to do so? Suppose they live in different countries? 

3. What is meant by the balance-of- trade argument? How far is 
it valid ? 

4. What is meant by the home-market argument ? How far is it 
vaHd ? 

5. What is meant by the infant-industries argument? How far 
is it valid ? 

6. What is meant by the standard-of-living argument? How far 
is it valid? 

7. What is meant by the anti-dumping argument? How far is it 
vaHd ? 

8. What is meant by the necessity- for-mihtary-supplies argument? 
How far is it vaHd? 



PART FIVE. DIVIDING THE PRODUCT 
OF INDUSTRY 






c^ 



CHAPTER XXVIII 
THE BARGAINING PROCESS 

Voluntary agreement. We saw in Part Four that the exchang- 
ing of goods and services forms an important part of the economic 
life of every nation. This involves a vast amount of bargaining. 
Under this system the average man's prosperity will depend largely 
upon whether he can bargain advantageously or not. If he has 
some product or some service to sell, and is in a favorable position 
for selling it, he will prosper; otherwise not. This bargaining 
process, however, is a part of the system of voluntary agreement, 
which is the basis of all human relations in free countries. Why 
some prosper and others fail under this process, or why some pros- 
per more than others under it, is one of the most important of all 
economic questions. If we can answer that question we shall have 
the explanation of the great inequalities of riches and poverty 
which form so regrettable a phase of modern life. If we can find 
the explanation of these inequalities in bargaining power, we shall 
then be in a position to apply remedies. Without this explanation 
we can know nothing whatever about remedies. 

Universal abhorrence of violence and fraud. But, first, let us 
go back to first principles. Every civilized country regards vio- 
lence and fraud as hateful. In our country, in particular, and in 
others with the same moral ideas as ourselves, it is recognized as 
wrong for anyone to get any desirable thing by either of these 
methods. Consequently the laws of the land refuse to recognize 
anyone's title to anything which he gets by either of these methods. 
There is also a tendency to recognize his title to anything 
which he can secure by any other method whatsoever and, when 
he has once got it by any other method, to protect him in its 
possession against all violent or fraudulent methods of dispossessing 
him of it. 

253 



2 54 ELEMENTARY ECONOMICS 

Other methods of getting what you want. What are the 
other possible methods by which a man can get what he wants ? 
First, he may find and appropriate it, provided no one else has 
already appropriated it. Second, he may make it, if it is a thing 
which can be made and if he can get the raw materials without 
violence or fraud. Third, he may get it from someone else. But 
since he is forbidden to use violence or fraud, he must get it from 
someone else with that person's full and free consent — that is, 
by his voluntary agreement to give it up. Therefore, there are 
not many ways of getting the thing you want from another person, 
(i) You may secure it as a gift. (2) You may inherit it. (3) You 
may get it in peaceful and voluntary exchange. 

Finding, making, and buying. All of these methods are recog- 
nized by the laws of our country and of most civilized countries. 
"Finding is keeping" is an old adage which recognizes the superior 
claim of the person who first finds a thing. Your only way of get- 
ting it away from him, under the system of voluntary agreement, 
unless he decides to give it to you of his own good will, is to buy 
it of him. You are not allowed to take it from him by violence 
or fraud. Again, if he makes it from materials which he has 
secured without force or fraud, it is recognized as his, and no 
one can take it from him except by his own free consent. Finally, 
if you do secure it from either its finder or its maker by his free 
consent, without force or fraud, by a peaceful and voluntary ex- 
change, then it is yours in as full and complete a sense as it was 
his before the exchange. You are now, as he was before, protected 
against force or fraud, and no one else can get it from you except 
by the method of voluntary agreement. 

The frequent desire to get something which someone else pos- 
sesses, leads, under this system of voluntary agreement, wherein 
force and fraud are forbidden, to the vast process of exchange and 
the all but universal bargaining process. In this age of specializa- 
tion no one can find or produce everything that he wants. Every- 
body, therefore, wants many things which he can get from other 
people only by the bargaining process. How many of these things 
he can get will depend upon what he has to give in exchange and 



TPIE BARGAINING PROCESS 255 

how much power in exchange these things have, or how much 
bargaining power they give him. 

Sources of unusual bargaining power. Some few become 
immensely rich by finding something which possesses great power 
in exchange. One who finds hidden treasure, a gold mine, a rich 
oil or gas well, is regarded as having come legally into possession 
of it. He is therefore protected against force or fraud as impar- 
tially as though he had found or made an article of little value or 
importance. Under the system of voluntary agreement he may 
become a very rich man, merely because he happened to find 
something which other people want and for which they are willing 
to pay him large sums. It is true that he did not produce his 
wealth, neither did any of those who want to get it away from 
him. He has not robbed nor defrauded anybody, and the law, as 
it now is, will not permit anybody else to rob or defraud him. 

Again, if he is such a genius as to make something which others 
want badly and for which they are willing to pay large sums, he 
may become immensely rich. Being protected against force and 
fraud, he cannot be dispossessed without his consent, and if he 
chooses to ask a high price, there is nothing to do but to pay it 
or do without the article. 

Again, if he brings something to the free and open market, by 
peaceful and voluntary exchange, robbing and defrauding nobody, 
its price may go up or down. If it goes up it is because people 
decide that they want it more intensely than they did before. 
Nevertheless, under our laws against force and fraud, he cannot 
be dispossessed except by peaceful and voluntary exchange. If he 
sees fit to exact a high price, and the circumstances are such as to 
give him great bargaining power, he is likely to prosper. 

Inequalities of bargaining power. These possibilities are men- 
tioned to show that under our system of voluntary agreement and 
the bargaining process great bargaining power and great pros- 
perity may come to a man occasionally through no fault and no 
merit of his own. An equal number of illustrations could be 
furnished to show that low bargaining power and low prosperity 
may occasionally come to a man through no merit and no fault of 



2 56 ELEMENTARY ECONOMICS 

his own. Nevertheless, with all these possibilities in mind, wise 
men will think twice before deciding to give up the system of 
voluntary agreement. It has its dangers, but, with all its faults, 
it has proved the best system that has ever been tried. It is 
the only system under which free men can possibly live. 

Aside from lucky finds, strokes of genius, and fortunate turns of 
the market, what are the conditions that give greater bargain- 
ing power to one class than to another? The answer must be 
found by studying the conditions of the market in which they sell 
their products or their services. In the following chapter we shall 
study some of the fundamental conditions which determine the 
market value of the services which each class has to sell. 

EXERCISES 

1. What is meant by the bargaining process? 

2. What bearing has it upon differences in prosperity? 

3. Suppose bargaining power to be equal among all people, could 
there be any great differences in prosperity? 

4. If you have something which many want and which few possess, 
does it give you great bargaining power or small bargaining power ? 

5. If you have something which few want and many possess, does 
it give you great bargaining power or small bargaining power? 

6. If you can do something which many want to have done, but 
which few can do as well as you can, is your bargaining power great 
or small? 

7. If you are only able to do something which many others can do 
as well as you can, and which few care to have done, is your bargain- 
ing power great or small? 

8. Could many things be done by voluntary agreement among free 
citizens if violence or fraud were generally permitted? 

9. If you are not permitted to use violence or fraud, how could you 
get from another citizen something which he has and which you want ? 

10. Suppose that the price of what you possess rises or falls on the 
market, how does that affect your bargaining power? 

11. Can there be a free country where men are not free to do a 
great many things by voluntary agreement among themselves? Does 
this mean that there will be a great deal of bargaining ? 



CHAPTER XXIX 
THE LAW OF VARIABLE PROPORTIONS 

Prosperity and bargaining power. The ability of individuals 
or classes to prosper under the system of voluntary agreement will 
depend upon their ability to sell whatever they have to sell at 
a good price. It is mainly a matter of market conditions. The 
laborers, who have labor to sell, may adopt various bargaining 
devices, but in the main the price of their labor will depend upon 
market conditions rather than upon their bargaining methods or 
devices. The same will be true of the landowners, the capitalists, 
the technicians, the independent business men, and every other 
class. Our first problem must be, therefore, to study the market 
value of each factor of production in order to find out why the 
seller in each case gets a large or a small share. 

Income a price received for services. The income of each 
class, however, is a flow rather than a fund or a lump sum. The 
laborer sells not himself, but the flow of productive energy which 
he can exert during a given period of time. The capitalist derives 
income not by selling his capital, but by selling the flow of utilities 
which come from his capital during a given period of time. The 
landowner does the same with his land. The following outline will 
indicate the relation of these various problems to the general prob- 
lem of valuation. For convenience the flow of utflities yielded by 
the various factors of production is called services. 

r Consumers' goods 
' Of goods -i ( Land 

1^ Producers' goods < Capital 
Valuation < [ Laborers (under slavery) 

r Of land (yielding rent) 
.Of services^ Of capital (yielding interest) 
[Oi laborers (earning wages) 
257 



2 58 ELEMENTARY ECONOMICS 

Why productive agents are desired. The reason for paying 
for an agent of production is that it helps to produce something 
which is desirable. Its value is derived from that of its products. 
If its product has a high value the productive agent is likely also 
to have a high value. In other words, it will give its possessor 
great bargaining power. 

When several things have to be combined in order to produce a 
product, these things are called factors of production. The pos- 
sessor of one factor may possess greater bargaining power than the 
possessor of another factor. In that case the one will get a larger 
share of the total value of the product than the other. Another 
way of saying the same thing is that one factor has more value 
than the other. 

Why one productive agent commands a larger share of the 
product than another. Since a factor of production has value 
only because of its product, if one factor has more value than 
another it must be because it is believed that it contributes more 
value to the product than the other contributes. Why this belief 
exists is one of the most difficult of all economic problems. The 
student is requested to study the following analysis very carefully 
and without prejudice. 

Need of a proper balance. In Chapter XV we learned of the 
importance of a proper balance among the different factors or 
substances that have to be combined in order to get a desirable 
result. This is as true when the desired result is the production 
of a commodity as when it is the preparation of a dish or any 
article of consumption. To choose a single example out of many : 
when there is an abundance of cranberries and a scarcity of sugar 
it is difficult to produce satisfactory cranberry sauce in large 
quantities, in spite of the abundance of cranberries. People will 
desire more sugar than they have, and desire it intensely, while 
they will not desire more cranberries so very intensely when they 
cannot get sugar to go with them. This intense desire for more 
sugar, and the lack of an intense desire for more cranberries, will 
make it easy to sell sugar and hard to sell cranberries. Those 
who have sugar to sell are in a favorable position for bargaining, 



THE LAW OF VARIABLE PROPORTIONS 259 

while those who have cranberries to sell are in an unfavorable 
position. Temporarily, at least, sugar will command a larger 
share of the value of the sauce, and cranberries a smaller share, 
than would be the case if sugar were more abundant and cran- 
berries scarcer. 

But labor, land, and tools have to be combined for the produc- 
tion of most commodities as certainly as sugar and cranberries 
have to be combined in the production of cranberry sauce. If 
these factors of production are not found in well-balanced pro- 
portions, one class is likely to be more favorably situated than 
another with respect to bargaining. Again, many different kinds 
of labor and many different kinds of tools frequently have to be 
combined in order to get a product. If these different kinds are 
not found in well-balanced proportion, there is as certain to be 
a difference of prosperity as there is between the sellers of sugar 
and the sellers of cranberries in a time of sugar shortage. 

No matter how many hodcarriers and brickmakers there are 
in a given neighborhood, if there is a scarcity of brick masons, 
not many brick houses can be built. It would not add much to 
the production of brick houses to produce a lot of new bricks or 
to bring in a number of additional hodcarriers. However in- 
tensely men desired new brick houses, there would not be a very 
intense desire for hodcarriers or brickmakers, but there would 
be an intense desire for brick masons. It is easy to see that 
under these conditions brick masons would be more prosperous 
than hodcarriers or brickmakers ; in other words, masons would 
command a larger share and the others a smaller share of the total 
value of a house built by the joint labor of all than would be the 
case if brick masons were not so scarce. 

This is a principle of the very widest application. It applies 
not simply to the preparation of a dish in which the ingredient 
that is scarce and hard to get will be eagerly sought after 
while the one that is abundant and easy to get will not ; it applies 
equally to the combination of different kinds of labor, different 
kinds of tools and machines, to the combination of labor and 
capital and of labor and land. In every combination of factors of 



26o ELEMENTARY ECONOMICS 

production the factor that is scarce and hard to find in suf- 
ficient quantity to balance the other factors will be eagerly sought 
after. They who possess it will have great bargaining power 
in any free country. On the other hand, the factor which is over- 
abundant, which is easy to find in quantities greater than neces- 
sary to balance the other factors, will not be eagerly sought after. 
They who possess this factor will have little bargaining power. 
They must seek for buyers and take what they can get. 

These results are unavoidable so long as we are in a country 
where things are done by voluntary agreement or where free bar- 
gaining exists. We must submit to it or else do away with the 
system of voluntary agreement and substitute a system of author- 
ity, such as exists in a great military organization. 

This does not mean, however, that there is no cure for poverty 
or for inequalities in prosperity. It is possible so to equalize 
bargaining power, by balancing the factors of production, as to 
diffuse prosperity among all classes and still leave them free 
men. How this can be done will be shown in the last chapter 
of this book. 

EXERCISES 

1. Upon what does the bargaining power of a man or a class 
mainly depend, their shrewdness as traders or the conditions of the 
market ? 

2. Why are factors of production desired? 

3. What determines how much they are desired? 

4. What is meant by a balance among the factors of production ? 

5. When one of the necessary ingredients of a dish is scarce and 
hard to find and another is abundant and easy to find, which is likely 
to sell more readily? 

6. Who is likely to get the larger share of the value of the dish, 
the one who supplies the scarce ingredient or the one who supplies the 
abundant ingredient ? 

7. Could it be otherwise in a free country? 

8. When both ingredients are equally scarce or equally abundant, 
relatively to the need for them, would there be any great difference in 
their salability? 



CHAPTER XXX 
THE GENERAL NATURE OF THE WAGE QUESTION 

How intensely is a man's labor desired ? The price of labor, 
like the price of commodities, depends upon how much it is desired 
in comparison with other things. The question is not how in- 
tense is the need or desire for labor in general, nor how great 
would be the loss if all labor were wiped out of existence. The 
question is how intense is the need for the labor of the individual 
men who are looking for work. 

The need for more labor rather than the absolute need for 
labor. It may be true that if there were no labor of a given class, 
say that of ditch diggers, the community would suffer terribly. 
Nevertheless, there may be so many ditch diggers that the addi- 
tion of one to the total number would add very little to, and the 
subtraction of one would subtract very little from, the well-being 
of the community. The indispensable man, like the indispensable 
commodity, commands the high price. The man who can be easily 
spared, like the superfluous commodity, brings the low price. 

The functional theory of wages. This may be called the 
functional theory of wages, and it forms a part of the functional 
theory of value which was outlined in a previous chapter. The 
function of a high price, in the economy of the nation, is to call 
into existence a larger supply of the thing for which it is offered. 
The function of a low price is to discourage the production and 
reduce the supply of the thing for which it is offered. If a larger 
supply is desired or needed, a high price is the means of getting 
it. If a larger supply is not desired or needed, a low price is the 
means of checking, limiting, or reducing the supply. Find out, in 
any given case, how much better off a community would be, or 
thinks it would be if it had more of a given thing than it now has, 

261 



2 62 ELEMENTARY ECONOMICS 

and you have a fair measure of the reward which it could afford, 
or thinks it could afford, to pay in order to get more. 

There may be members of the community who desire intensely 
to possess a certain commodity or to hire a certain kind of labor, 
but who have not the wherewithal to purchase or hire it. They 
will therefore have little influence on the price or the wages. This 
impecunious condition may be due to the fact that others have 
no great desire for the labor or the products of the persons in 
question. In that case the community does not value their services 
very highly, and therefore their desires have little influence on the 
market for other things or other services. 

Productive labor is wanted because of its product. Our next 
task is to find out what determines how much the labor of any 
particular man or group of men is wanted. In the simplest pos- 
sible case — that of a laborer who, without any help from any- 
body else, produces a complete article — his labor is needed just 
as much as and no more than the article itself is needed. The 
price of the article, then, is his reward. If he is not satisfied with 
his income he must find fault with the price which the consumer 
pays for the product, for he gets the whole price. This, however, 
is a case so simple as to be very exceptional. Very few finished 
products are produced by the labor of a single person. One who 
goes out into the woods and gathers nuts or berries, carries them 
in vessels which he has himself improvised, and sells them directly 
to consumers may come under this class. 

Goods generally produced by the joint labor of a number 
of persons. We are sometimes told that most goods are socially 
produced. It would be better to say that most goods are produced 
by the joint efforts of several persons. The total reward which 
can go to all of them cannot in the long run exceed the total value 
of the finished product. This must be divided among all those 
who have taken part in its production. The price of the loaf of 
bread must reward all those who have had any part in its pro- 
duction, including the baker, the miller, the various transportation 
agencies, and the farmer, as well as the manufacturers of the 
farmer's, the baker's, and the miller's tools, and so on back to the 



GENERAL NATURE OF THE WAGE QUESTION 263 

lumbermen and the miners who extracted the raw material out of 
which the tools were made. 

The successive division of labor does not create a very diffi- 
cult problem in distribution. Division of labor is of two kinds: 
contemporaneous and successive. We have the successive division 
of labor among the farmer, the miller, the railroad, and the baker, 
since, one after the other, they work upon the same material. We 
have an example of the contemporaneous division of labor in the 
case of the mill owner and his employees of various kinds, the rail- 
road company and its employees, the farmer and his hired men, and 
so on. The problem of distributing the price of the finished prod- 
uct among those who work upon the raw material in regular suc- 
cession is simply a problem in the price of commodities. Thus the 
reward of the farming group comes to them in the form of the price 
of wheat. This price must then be distributed among the contem- 
poraneous workers on the farm ; that is, the farmer himself and his 
hired men. The difference between the price of wheat and the price 
of flour and its by-products must furnish the reward for the milling 
group, and the difference between the price of flour and the price 
of bread must furnish the total reward for the baking group. 

All this is fairly simple and leads to no serious social problem. 
The commodity market is supposed to take care of it, and social 
reformers in general have not exercised themselves to any great 
extent on the subject. Occasionally, of course, someone is ac- 
cused of cornering wheat or manipulating the price of flour. 

The division of the product among contemporaneous workers 
the difficult problem. The great social problem of today, so far 
as it relates to the distribution of wealth, is the problem of dis- 
tributing the price of the product among the contemporaneous 
workers. Of the total price of wheat, how much should go to 
the landowner (if he is a different man from the farmer), how 
much to the farmer, how much to the laborer, how much to the 
capitalist (if he is a different man from the farmer)? Or, again, 
of the total spread between the price of wheat and the price of 
flour, which furnishes the total reward to the milling group, how 
much goes to the owner of the mill site, how much to the manager, 



2 64 ELEMENTARY ECONOMICS 

and how much to the various types of laborers? And so on 
through the transportation groups and the baking groups, the diffi- 
cult problem is always that of the distribution of the total earnings 
of the group among the contemporaneous workers within it. 

The law of variable proportions again. Not much headway 
can ever be made in the study of this problem unless we hold care- 
fully in mind the law of variable proportions asi explained in the 
last chapter. When it is suggested, for example, that each, factor 
of production should be paid for in proportion to its contribution 
to the product, any student who does not understand the law of 
variable proportions is likely to say that there is no way of finding 
out what each factor contributes. He will say, for example, that 
it is like trying to find out how much of the welding is done by the 
anvil and how much by the hammer, or how much of the cutting 
by the upper and how much by the lower blade of the scissors. 

To use this comparison is to show that one does not understand 
the problem. If one blade of the scissors were a little longer than 
the other, it would not require any so-called metaphysical or 
theoretical reasoning to see that the scissors might be improved by 
lengthening the shorter blade. If two workmen were to offer their 
services, one to lengthen the longer blade and one to lengthen the 
shorter blade, it would not take much of a philosopher to decide 
which workman it would be better to hire. The workman who 
would lengthen the shorter blade would add somewhat more to 
the cutting power of the scissors than the workman who would 
lengthen the longer blade. 

How important is it that we have more of a certain thing ? 
Most economic problems, as pointed out many times already in 
this volume, relate to the problems of more or less, of improve- 
ment or deterioration, of readjustment of existing equipment, 
organization, etc. If, for example, a farmer found that he could 
increase his crop more by having extra help than by having more 
land, he would be more likely to offer wages to someone than to 
offer rent to someone else. If farmers generally felt that way 
about it, wages would be high and rent low. Under the opposite 
conditions rent would be high and wages low. 



GENERAL NATURE OF THE WAGE QUESTION 265 

Under the law of variable proportions, or that special phase of 
it known as the law of diminishing returns from land, it is ac- 
tually found that in a community where there is an abundance of 
good land but a scarcity of labor to work it, the addition of one 
or more laborers to the existing number will make a considerable 
difference in the crop. That is a sufficient reason for paying high 
wages to labor. Additional laborers are very much needed ; the 
agricultural situation would be very much improved by having 
more laborers and would be very much injured if any were lost. 
The question of more laborers or fewer laborers is one of con- 
siderable importance. 

On the other hand, where land is so abundant and laborers 
so few that it is difficult to cultivate the existing land, it would 
not be of much advantage to production to have a few more acres, 
nor much of a disadvantage to have a few less. The question of 
more or less is not, in this case, very important. This is the 
question which presents itself to the practical farmers. The ques- 
tion as to which is absolutely more important, land or labor, is 
a question which occurs only to armchair philosophers. This 
would be in all respects like the question as to which does more of 
the cutting, the upper or the lower blade of the scissors. 

Shares generally divided into wages, rent, interest, and 
profit. It simplifies the problem somewhat to classify those who 
take part in the contemporaneous division of labor according to 
the functions which they are supposed to perform. It is customary 
to divide them into four main classes. The first class is made up of 
the laborers, who work either with their hands or with their heads 
and receive their share in the form of wages or salaries (for the 
sake of simplicity salaries are, in this chapter, included under 
wages) ; the second class is made up of the landowners, who own 
the land and receive rent; the third class is made up of the 
capitalists, who supply the capital and receive a reward in the 
form of interest ; and the fourth class is made up of the inde- 
pendent business men, who undertake to assemble all the other 
factors, — who take the chief risks of the enterprise and receive 
whatever is left over after all the others are paid, and call it profits. 



2 66 ELEMENTARY ECONOMICS 

We may say in general that when one factor of production is 
oversupplied in proportion to the others which need to be com- 
bined with it, the question of getting more of it, or even of 
maintaining the existing supply, becomes unimportant. Accord- 
ingly not much will be paid in order to get more of it, or even 
to hold the existing supply. But when any factor is undersupplied 
in proportion to the others which have to be combined with it, 
the question of getting more of it, or of holding the existing 
supply, becomes very important. Accordingly a high price will 
be offered for it. 

This principle applies not simply to land, labor, and capital, but 
to the different kinds of each. If there is a scarcity of skilled labor 
in proportion to the unskilled labor which has to be combined with 
it, it becomes very important to get more skilled labor or at least 
to keep some of the existing supply from going elsewhere. In that 
case a high wage will be offered for skilled labor. Under the same 
conditions there is, of course, a large supply of unskilled labor in 
proportion to the skilled. It is therefore not very important that 
there should be more unskilled labor, nor even that the existing 
supply should be kept from diminishing. Not much is likely to be 
paid, under such conditions, for unskilled labor. 

The next question is, What determines the relative supply of 
the various factors of production ? 

EXERCISES 

1. What, in the simplest form of statement, determines how much 
will be paid for a man's labor? 

2. If more laborers are needed than are offering to work at exist- 
ing wages, how can more be secured? 

3. Why does anyone desire to hire labor? 

4. How may the desire to hire labor be increased ? 

5. Where two or more kinds of labor have to combine in order to 
produce something, why does anybody find it necessary to pay higher 
wages to one kind than to another? 

6. Would it be necessary if all kinds of labor were equally 
abundant ? 



GENERAL NATURE OF THE WAGE QUESTION 267 

7. How is it determined what share of the price of bread goes to 
the farmer, the miller, and the baker? 

8. Is this the same question as that of determining what share of 
the price of wheat goes to the farmer and what share to the farm 
hand? 

9. When labor is scarce and land abundant in a farming community, 
how would it affect the total crop if a few more good farm hands were 
to come? How would it affect the crop if a few more acres were 
opened up to cultivation? Do these questions have anything to do 
with the wages of labor and the rent of land ? 

10. What are the principal shares into which the products of 
industry are divided? 



CHAPTER XXXI 

WHAT DETERMINES THE RATE OF WAGES? 

Causes of differences of wages in different occupations. Let 

us consider, first, the causes of the difference of wages in different 
occupations. If in order to get efficient production it is found 
necessary to have a high degree of specialization, many different 
kinds of skill will be found in the same establishment, each kind 
contributing its share toward the production of the same product. 
Men possessing these different kinds of skill will be needed in 
slightly variable but fairly definite proportions. In the production 
of cloth, for example, spinners and weavers will be needed in fairly 
definite proportions. If by any accident it could happen that for 
a period of time there were more spinners than were necessary to 
supply yarn for the weavers, the value or importance of each spin- 
ner would be considerably reduced. Under these conditions, if 
they could exist, it would be literally true that the loss of a few 
spinners would bring little loss to the industry, provided the re- 
maining spinners could supply all the yarn the weavers could 
use. On the other hand, the labor of each weaver would be of 
considerable importance. 

Since there would not be weavers enough to use all the yarn 
that could be produced, one less weaver would reduce the totkl pro- 
duction of cloth, and one more weaver would add to the total 
production, assuming that machinery and room were available. 
Under these conditions there would grow up in any free com- 
munity a difference in wages in favor of the weavers and against 
the spinners. This would be called the law of supply and demand, 
but this law rests on certain fundamental advantages and dis- 
advantages. The addition to the total output of cloth which would 
result from an increase in the number of weavers would really be 

268 



WHAT DETERMINES THE RATE OF WAGES? 269 

much greater than the addition which would result from an equal 
increase in the number of spinners. This would be a sufficient 
reason why a higher price should be offered for the labor of weavers 
than for that of spinners. In the absence of compulsion that 
would be the only way of attracting more weavers and fewer 
spinners. 

Of course this condition would soon correct itself. If the wages 
of the weavers were allowed to go up and the wages of the spin- 
ners to go down, some of the spinners would have an excellent 
reason for changing their occupation. If they could not easily do 
so the oncoming generation of laborers, who have to choose be- 
tween the occupation of weaver and that of spinner, would be 
attracted into the one where the wages were higher, and thus 
restore the equilibrium. But if wages were not allowed to read- 
just themselves because of some compulsion on the part of the 
government or some other agency, then there would be no reason 
why the oncoming generation should go into the occupation where 
they were most needed. Where the ordinary processes of bargain- 
ing are not interfered with, wages tend to be high in those oc- 
cupations where more men are needed, and needed badly, and 
low in those occupations where there is no great need for more 
men. The function of these differences of wages is to restore the 
equilibrium between different occupations. 

Cost of acquiring skill. If there is some permanent obstacle 
in the way of a free choice of occupations, there may be a perma- 
nent difference in the wages in different occupations, based upon 
a permanent undersupply of labor in one and a permanent over- 
supply in another. If, for example, a certain occupation requires 
a kind of skill which is not widely distributed or easily acquired, 
whereas another occupation requires a kind of skill which multi- 
tudes of people possess or can easily acquire, there is likely to be 
a permanent undersupply of the one kind of labor and a perma- 
nent oversupply, at least relatively, of the other. The cost of 
training or the difficulty and irksomeness of the necessary study 
and practice will serve to limit the number of people who succeed 
in entering the highly skilled occupations. 



2 70 ELEMENTARY ECONOMICS 

In this respect the cost of acquiring the necessary skill acts very 
much as the cost of producing a commodity. As the price of the 
commodity must be high enough to cover the cost, so the wages of 
labor in a highly skilled occupation must be high enough to pay the 
cost of acquiring the skill or to overcome whatever disinclination 
there may be to the preliminary work of study and practice. If 
this cost is high the wages must be correspondingly high. If the 
cost is very low, so that practically no one is deterred from enter- 
ing the occupation, the wages will be correspondingly low. 

Some skill is absolutely limited. There may, however, be 
certain kinds of skill which are so scarce as to be almost incapable 
of being increased. Certain kinds of work may require a man of 
genius rather than a man of training, but in most cases it will be 
found to be a matter of training. An indefinite number of men 
could be trained for almost any occupation if the wages were 
only high enough to furnish a sufficient inducement. 

This, however, will depend somewhat upon the opportunities for 
education and training. Under a system of free public education 
the cost of training is greatly reduced and should naturally in- 
crease the supply of highly trained labor. Where the money cost 
of education is eliminated, the only cost remaining is the irksome- 
ness of hard study. Those to whom this irksomeness is very slight 
will naturally be attracted into the more highly paid occupations. 

There may, however, be artificial restrictions in the way of 
entering certain well-paid occupations. If the laborers in one of 
those occupations where apprenticeship still prevails should limit 
the number of apprentices, that would of course limit the number 
of laborers who could acquire skill enough to follow the occupation. 

In other cases the policy of the closed shop might be carried to 
such an extreme as to reduce the supply of labor in the given oc- 
cupation and thus prevent the readjustment of the labor supply 
to meet the demand. The tendency of freedom, however, is to en- 
courage the automatic readjustment of the supply of labor to the 
demand. 

These are the principal factors which determine the excess in 
wages of the skilled trades and occupations and the learned 



WHAT DETERMINES THE RATE OF WAGES? 271 



professions over and above those paid in what are known as the 
unskilled occupations. By the unskilled occupations are meant, 
however, those which require a kind of skill which practically 
everybody can acquire without much special study. We have, 
therefore, the problem of finding out what determines the wages of 
this general mass of unskilled labor. What is there here which cor- 
responds to the cost of producing a commodity or to the cost of 
acquiring the skill required in one of the well-paid occupations? 
The factors of cost here are, first, the disinclination to work, and, 
second, the disinclination to multiply. 

' Fatigue 
Long hours 

Loss of opportunity for 
pleasure 

A high standard 

of living 
Late marriages 
Birth control 



' Disinclination 
to work be- 
cause of 



f In the unskilled 
trades 



Causes of 
THE Scarcity 
OF Labor 



Disinclination to mul- 
tiply because of 

f Women 



Exclusion of <| Children 

1^ Men of other races 
Restriction of immigration 
Encouragement of emigration 

rWar 
. Destruction of Hfe through -| Pestilence 
[ Famine 
' Rarity of genius 
Expenses of education 
L In the skilled trades -{ Disinclination to study 

Reduction of number of apprentices 
L Closed shop 



Scarcity of unskilled labor. Among the vigorous European 
and American stocks the disinclination to work is not so very 
great. Nevertheless, there is an appreciable quantity of labor 
which is chronically withdrawn from productive work by reason 
of this factor. That part of the leisure class which is made up 
of people who have inherited, married, or otherwise come into 



2 72 ELEMENTARY ECONOMICS 

possession of sufficient wealth to enable them, to live without work, 
shows this disinclination rather clearly. There are also the chronic 
loafers, the tramps, and the nomadic element among us, who show 
a strong disinclination to work. 

The disinclination to multiply is unfortunately strongest among 
those who possess the most forethought. Those who live only in 
the present show no such disinclination. People without fore- 
thought marry early and have large families. Those, however, 
who look to the future, not only of themselves but of their 
children, who foresee the disadvantages which their children will 
suffer if they are insufficiently nourished or inadequately educated, 
generally have small families. Marriages of those who take 
thought for the future are postponed until they are able to support 
and educate their children. 

The group of motives and factors which serve to hold popu- 
lation in check are generally called by the name "standard of 
living." This is a somewhat technical term in economics and re- 
quires some careful explanation. 

Meaning of "standard of living." Technically the term 
"standard of living" means the number of desires which, in 
the average person of the class in question, take precedence 
over that group of desires which result in the multiplication of 
numbers. For purposes of discussion we will call the latter group 
of desires the domestic instincts. When the domestic instincts act 
powerfully and without opposing motives to hold them in check, 
the individual will undertake the support of a family before he is 
assured of a sufficient income, to satisfy any but the most elemen- 
tary desires. Under these conditions he is said to have a low 
standard of living. In other cases a large number of other desires 
take precedence over the domestic instincts. An individual of 
whom that can be said will not marry and undertake the support 
of a family until he feels reasonably certain of being able to satisfy 
all these other desires. He is said to have a high standard of 
living ; that is, an expensive standard. 

If we can imagine a community to which immigrants from the 
outside do not come, and in which the average unskilled laborer 



WHAT DETERMINES THE RATE OF WAGES? 273 

has a high standard of living, we shall have a community in which 
the average laborer will not marry and undertake the support of 
a family until he is sure of wages high enough to satisfy a large 
number of desires. The rate of multiplication will therefore be 
slow, the oncoming supply of labor scarce, and in the succeeding 
generations laborers will thus be able, through the smaller supply, 
to continue to get high wages. 

The law of population. This brings us to the great law of 
population, which has generally been associated with the name of 
Malthus. The law which Malthus worked out and which has 
never been successfully refuted, though many attempts have been 
made, may be stated briefly as follows : 

1. Every species of plant and animal has the physiological 
power to multiply faster than its means of subsistence will permit. 
Subsistence is the factor which actually limits numbers. 

2. The physiological power of human increase is also so great 
that if it should operate without moral or social restraints of any 
kind, it would carry population to such limits that vice or misery 
or both w^ould begin to thin out the surplus population and thus 
operate as a check upon further increase. 

3. Owing to the law of diminishing returns, a larger number 
of people cannot, in any given state of civilization and of the indus- 
trial arts, be so well provided for from the produce of a restricted 
area as a smaller number can. 

4. The postponement of marriage until a comfortable income 
is assured tends to keep numbers within such limits as can be 
comfortably maintained. 

Effect of immigration. We began our discussion of the 
standard of living by assuming a community to which no immi- 
grants came. If unskilled immigrants came in large numbers, it 
would offset the results of a high standard of living. However 
high the standard of living of the native laborers, or however 
strong the tendency of the educational and social system to raise 
the standard of living, if large numbers of immigrants with a low 
standard continue to come in, their presence will keep the standard 
down to a low level. At any rate the oversupply of unskilled 



2 74 ELEMENTARY ECONOMICS 

labor will tend to keep wages down. Their coming tends to 
make business conditions easier for men who need to employ un- 
skilled labor, but to make conditions very much harder for the 
unskilled laborers who are already here. If, however, the im- 
migrants resemble those Americans who go to the Philippine 
Islands (that is, if they belong to the skilled, the professional, and 
the employing classes), they tend to make conditions easier for 
the unskilled laborers but harder for the skilled, the professional, 
and the employing classes who are already there. 

Summary. The discussion thus far may be summarized as 
follows : 

1. The wages of any person will depend upon how much his 
labor is desired. The wages of any class will depend upon how im- 
portant it is thought to be that there should be more laborers 
of that class, or that there should not be any less. High wages 
indicate a strong desire and low wages a weak desire to have more 
of a certain kind of work done. 

2. Different kinds of labor usually have to be combined in 
fairly definite but somewhat variable proportions. If there hap- 
pens to be more of a certain kind than will combine satisfactorily 
with the existing supply of the other necessary kinds, the over- 
supplied kind will not be strongly desired. There will be no great 
need for more of it, and therefore no strong reason for paying 
high wages. The kind of labor, however, which is'undersupplied 
will be much more needed. There will be a strong reason for 
desiring more of it, and the only way, in a free society, to get more 
of it is to offer high wages. 

3. Labor which requires a kind of skill that is difficult to 
acquire will usually be scarce, relatively to the need for it. Wages 
must be high enough to induce men to make the necessary effort 
in order to fit themselves for the work. 

4. Unskilled labor is usually abundant, being limited only by 
the disinclination to work, by the standard of living, or by the 
cost of bringing up children. Where the cost is high, or the un- 
willingness great, wages must be high enough to induce men to 
marry and bring up children. When the cost is low and there 



WHAT DETERMINES THE RATE OF WAGES? 275 

is very little unwillingness to overcome, wages may be low because 
men will bring up children on very low wages and thus keep 
the supply of labor intact. 

EXERCISES 

1. Why are there differences of wages in different occupations? 

2. Would there be any considerable differences if every man were 
equally well fitted for every occupation? 

3. Would there be any considerable differences if every kind of 
skill could be acquired with equal cost? 

4. Do you consider that the necessity for hard study is a kind of 
cost? Would it be if everybody liked hard study? 

5. What are the chief causes of the scarcity of unskilled labor? 

6. What' are the chief causes of the scarcity of skilled labor? 

7. What is meant by the standard of living? 

8. What limits the number of pine trees that can grow ? Is it the 
number of seeds, or the means on which pine trees subsist? 

9. What effect has immigration on the wages of unskilled labor 
(i) when the immigrants are mainly unskilled laborers? (2) when 
the immigrants are mainly employers ? 



CHAPTER XXXII 
THE ORGANIZATION OF LABORERS 

Comparative advantages in bargaining. It has long been 
recognized that in the ordinary bargaining process between labor- 
ers and their employers, the laborers are usually at a disadvan- 
tage. The reasons why they are at a disadvantage have been 
variously stated. It is argued, for example, that the capitalist can 
wait longer than the laboring man, and thus wear the laboring 
man out and force him to give in and accept the capitalist's terms. 
The capitalist, it is said, having an accumulation of wealth, can 
live on that ^accumulation. 

There is doubtless something in this argument, though it is 
easy t© exaggerate it. If the capitalist's accumulation is in the 
form of buildings and machinery, it is difficult to see how he can 
live on these things. He might borrow money on the basis of the 
security which they furnish, and with this borrowed money buy 
consumers' goods. But if he owned his own house, if he had in- 
surance policies, or deposits in the savings bank, he would have 
the same or even greater waiting power than he has when he owns 
capital of equal commercial value. 

It is therefore frequently argued that one remedy for this situ- 
ation is for the laborer himself, as far as possible, to acquire his 
own home, life-insurance policies, and deposits in savings banks. 
This would help, at any rate, to give him the power to wait, and 
would thus help to even up the advantages in bargaining. The 
objection to this is the simple observed fact that the laborers have 
less property of any kind than their employers ; otherwise they 
would not be laborers. This being the fact, it does not help much 
to point out what the laborer might do if the facts were otherwise. 

Another reason given for the disadvantage of the laborer in the 
bargaining process is that h^ is usually less skillful in the matter 

276 



THE ORGANIZATION OF LABORERS 277 

of bargaining than his employer. His expertness is more likely to 
consist of manual skill than of skill in bargaining. The inde- 
pendent business man is peculiarly a bargaining person. He 
literally bargains for everything. If he borrows capital, if he rents 
land, if he buys raw materials, secures transportation rates, and 
hires labor, and also organizes a selling department, — every part 
of his work has to do with bargaining. He becomes, therefore, the 
bargainer par excellence. Those whose expertness lies in other 
directions are therefore at a disadvantage when they come to deal 
with him. This argument is undoubtedly correct as far as it goes. 

Employers are few, but laborers are many. The third fact, 
however, which usually works to the disadvantage of the laborer 
and the advantage of the employer is that laborers are usually 
numerous and employers few. There is usually more competition 
among laborers for jobs than among employers for men. Where- 
ever this fact does not exist, there is no great advantage on the 
part of the employer. 

In view of this fact, therefore, the fundamental and permanent 
remedy for the laborer's disadvantage in bargaining must be such 
a reduction of the number of laborers and such an increase of the 
number of employers as to give the laborer at least an equal ad- 
vantage in the bargaining process. Anyone who can become an 
employer instead of an employee can thereby increase the demand 
for labor and reduce the supply. 

Collective bargaining. That which is known as collective 
bargaining, as distinct from individual bargaining, is supposed to 
be a quick remedy for the immediate ills of the laboring man. 
In a trade where laborers are oversupplied, each individual laborer 
is in a weak position, because he can easily be spared. Because 
there is a superfluity of labor his place can easily be filled. Under 
such conditions his individual bargaining power is very weak ; he 
is practically compelled to take whatever terms are offered to him. 
His kind of labor as a whole, however, may be absolutely indis- 
pensable. While he as an individual could be spared without 
much inconvenience, the whole body of laborers in his trade are 
absolutely indispensable when considered as a whole. If they 



2 78 ELEMENTARY ECONOMICS 

were all to stop work, business would have to stop ; if they were 
all to emigrate, the whole business in which they were engaged 
would be destroyed. 

The group may be indispensable, while the individual could 
easily be spared. The fundamental principle involved in the 
trade-union policy of the present is the substitution of the indis- 
pensable group for the superfluous individual as a bargaining unit. 
Since the group as a whole is indispensable to industry, if they 
can bargain as a whole the laborers are in a strong position. As 
a group they cannot be spared. The difficulty, however, has al- 
ways been to hold the group together and get them to bargain 
absolutely as an indispensable group and to refrain from making 
individual bargains independently of group action. 

The trade union. This underlying principle has given rise to 
one of the largest social movements of modern times ; namely, the 
organization of laborers. Several types of organization, however, 
have entered the field, and there is still some rivalry among them. 
In the first place, there is the trade union pure and simple ; this 
is an organization of the men who ply the same trade ; that is, 
the men whose work is of the same kind. The Brotherhood of 
Locomotive Engineers is an example of this kind of organization. 

The industrial union. In the second place, there is the in- 
dustrial union, which includes all the laborers plying various 
trades who are engaged in the same general line of industry. The 
United Mine Workers of America is one example of this type of 
organization ; the Brotherhood of Railroad Trainmen of America, 
which attempts to take in all the railroad workers, is another. 

The labor union. A third type of organization is what may 
be called the labor union, which attempts to organize all laborers, 
of whatever trade or occupation and in whatever industry they 
may be engaged. The Knights of Labor had an organization of 
this type, and lately the Industrial Workers of the World have 
attempted a similar type of organization. 

The federation of trade unions. The trade union seems in 
recent years to have been somewhat stronger than either the in- 
dustrial union or the labor union, but it has felt the need of some 



THE ORGANIZATION OF LABORERS 279 

larger and more nearly universal type of organization. This has 
been secured by the federation of trade unions into a national 
organization known as the American Federation of Labor. This 
type of organization recognizes that each trade has certain special 
and peculiar interests of its own and therefore has a special reason 
for organizing as a trade. This is a principle which seems to be 
ignored by the labor union especially. By organizing the special 
and peculiar interests of each trade the federation becomes stronger 
at this most vital point. By federating the different trades for the 
furthering of the interests which are common to all, it becomes 
stronger at another important point ; namely, concerted action on 
a nation-wide scale. 

The attempt to ignore the special interests of each trade and to 
unite all workers, of whatever trade or industry, into one universal, 
undifferentiated organization, has had certain idealistic features 
which make a strong appeal to men of idealistic temperament. 
There is the attempt to ignore any possible rivalry of interests 
among different classes of laboring men. While this sounds at- 
tractive, it hardly accords with the observed facts. It is perhaps 
a little more humanitarian in its philosophy, but a little less effec- 
tive in its methods of work. It might be compared to an attempt 
to create a unified nation by ignoring all local interests and in- 
ternal conflicts, whereas the federation idea might be compared 
to a system of government which would recognize local and state 
interests and allow a certain amount of self-government to the 
local units, but which would unite them all under a national 
government for the carrying out of national aims. 

Necessity of controlling the supply of labor in its own 
market. Like all attempts in all fields to bargain to better advan- 
tage for the sale of either a commodity or a service, an organi- 
zation of laborers must get control of the supply of the service 
which it is trying to sell. This leads to the policy of the closed 
shop ; that is, the policy under which none but members of the 
organization are to be employed in a given shop or series of shops. 

If any considerable number of outsiders are permitted to work 
in these shops, they will of course bargain independently and be 



2 8o ELEMENTARY ECONOMICS 

in a weak position. That very fact also tends to weaken the power 
of the organization in the bargaining process. Unless the organi- 
zation can control the supply of labor which is permitted to work 
in a given trade, — can withdraw them as a body or put them back 
as a body, — it will .find itself unable to secure advantageous terms. 

The closed shop. An absolutely closed shop is very difficult to 
maintain when there is a surplus of laborers available for a given 
occupation. So long, for example, as indefinite numbers of foreign- 
born laborers can be had for the recruiting of the ranks of any 
trade, nothing but the most drastic measures on the part of the 
organization of laborers can preserve its control. 

The strike. The strike has become one of the drastic methods 
through which an organization of laborers may enforce its control 
over the labor supply. Theoretically the strike is merely the sus- 
pension of work by the laborers of a given trade or group of 
trades. If there were no waiting list and no available mass of 
laborers from which to fill the shops which they have vacated, a 
mere quiet suspension of work would be all that would be involved 
in a strike. This, however, is seldom the situation. There is 
generally such an oversupply of labor, especially of the unskilled 
kinds, as to force the strikers to do something else besides the 
mere suspension of work. They must manage somehow to keep 
others from taking their places. This may take the form of peace- 
ful picketing and persuasion ; it may take the form of threats ; 
and, in extreme cases, it may even take the form of violence and 
terrorism. 

It is to be remembered, however, that threats, violence, and 
terrorism are only necessary, even from the laborer's point of 
view, when there is an oversupply of labor available for the jobs 
of the strikers. The ultimate cure for this situation is that which 
was suggested earlier in this chapter, — such a thinning out of 
the number of laborers, especially in the unskilled occupations, as 
to reduce the number of men to an approximate equality with the 
number of jobs. 

Numbers make for weakness in bargaining but for strength 
in fighting and voting. One large fact which complicates the 



THE ORGANIZATION OF LABORERS 281 

whole problem of the organization of laborers and their methods 
is that those who, because of their numbers, are weak in the bar- 
gaining process become, by virtue of those same numbers, strong 
in the making of public opinion and in the election of candidates 
for office. Roughly speaking, one may say that the more people 
there are in a given trade, the weaker they are in the process of 
individual bargaining but the stronger they are in making public 
opinion and controlling elections. 

When a numerous class realizes that its numbers count against 
it in bargaining, but for it in fighting and voting, it is pretty cer- 
tain, sooner or later, to try to win back, by fighting or by voting, 
what it has lost in- bargaining. Therefore there are two very good 
reasons why we should try to maintain a balanced population. 

By a well-balanced population is meant a population in which, 
among other things, each occupational group is no more numerous 
than is necessary to combine with other occupational groups. If, 
for example, there are no more spinners than are needed to supply 
yarn for the weavers, no more of both than are required to com- 
bine satisfactorily with other groups, no more unskilled laborers 
than are necessary to work in combination with the skilled labor- 
ers, no more of both than are necessary to work in combination 
with salesmen, accountants, managers, etc., the population is well- 
balanced so far as these groups are concerned. When this is the 
case, no group will be at a disadvantage in the bargaining process. 
That is one reason. The other is that no group would have the 
motive or the power to win back, by fighting or by voting, what 
it was losing by bargaining. Such a balancing of our population 
would eliminate the more acute phases of our labor problem. 

EXERCISES 

1. Have unskilled laborers or their employers generally had the 
advantage in the bargaining process ? Why ? 

2. Is the laborer at a disadvantage when labor is scarce and hard 
to find? 

3. Has the indispensable man usually much difficulty in getting 
good wages? 



2 82 ELEMENTARY ECONOMICS 

4. How about the superfluous man? 

5. What are some of the methods by which laborers increase their 
bargaining power? 

6. What is meant by collective bargaining? 

7. What is meant by the trade union? by the industrial union? 
by the labor union? 

8. How would you describe the American Federation of Labor? 

9. What is meant by the closed shop? 

10. What is a strike? 

11. Does an increase in the number of laborers strengthen or weaken 
their bargaining power? How does it affect their voting and their 
fighting power? 

12. How would a decrease in the number of laborers affect their 
bargaining power ? How would it affect their voting or their fighting 
power ? 



CHAPTER XXXIII 
THE RENT OF LAND 

Rent the price paid for the use of land. The rent of land 
originally meant the price paid for its use during a given period 
of time. Its meaning is now extended to cover the income which 
the owner derives from it, whether he uses it himself or lets it out 
to someone else. The selling price of land is the price paid as a 
lump sum for its permanent possession, which includes its use 
through all future time. There is thus a very close connection 
between the value, or price, of land, on the one hand, and its 
rent, on the other. The rent is the value, or the price, of the flow 
of utilities which it yields during a given period of time, such as 
a month or a year. Both the value and the rent of land come 
under the general law of value. 

Why rent is paid. The utility of land is of various kinds and 
degrees. In some cases land yields its utilities directly, and thus 
is a consumers' good or at least resembles consumers' goods in 
this respect. Parks, pleasure grounds, and residence sites yield 
their utilities in this way instead of yielding tangible products. 
In other cases land yields its utilities indirectly ; that is, it pro- 
duces or helps to produce tangible products which are themselves 
useful. 

There are great differences in the utility or desirability of dif- 
ferent pieces of land, whether they are used for one purpose or for 
another. In the chapter on land it was pointed out that these 
differences are mainly in location and fertility. The other qual- 
ities which make land usable, such as extension and solidity, all 
land possesses in equal degree, so that these qualities do not make 
one piece more desirable than another ; but in the qualities of 
location and fertility there are great differences, and these dif- 
ferences powerfully affect its desirability and its value. 

283 



2 84 ELEMENTARY ECONOMICS 

Differences in the desirability of land. The problem of rent 
may be approached in several ways. In the first place, we may 
concentrate our attention on the differences in rent or the dif- 
ferences in the desirability of different pieces of land. There is 
always land somewhere the use of which can be had free of 
charge. Nevertheless, men will be found paying high rents for 
other land which is more desirable than that which can be had for 
nothing. The fact that it is more desirable than the free land is 
what makes it command a rent. In the case of land which is 
useful for production only, its desirability is of course determined 
by its productivity. He who secures the use of a superior piece 
of land can either produce more at the same cost than would be 
possible on the kind of land which is free or he can produce the 
same amount at lower cost. This difference in productivity gives 
its owner a rent when he cultivates or uses it himself and enables 
a tenant to pay rent in case the land is worked by a tenant. 

Location as an element in desirability. That the location of 
a piece of land will affect its productivity will be clear to anyone 
who will consider that the cost of transporting goods to market is 
a part of the cost of production. If one farm is so badly located 
with respect to railroads and markets that it costs ten cents a 
bushel to haul the wheat to the nearest railroad, while another 
farm is so well located that the hauling costs only two cents a 
bushel, it is evident that if the two farms are equally fertile the 
former will be worth considerably less than the latter. 

If land were so abundant that the badly situated farm in the 
above illustration and other land equally desirable could be had 
rent free, and if it were the most desirable land which could be 
had free, then land of this type might be called marginal land, or 
land on the margin of cultivation. By ^'marginal land" is meant 
land which, under the conditions of the market, men would be in- 
duced to cultivate if it cost them nothing, but which they would 
abandon and leave unused if they were required to pay even the 
lowest conceivable rent for its use. 

The margin of cultivation. Aside from the productivity of 
the land, two other factors help to determine the margin of 



THE RENT OF LAND 285 

cultivation. These are the demand for products and the demand 
for labor, or the opportunities for the employment of labor. An 
increase in the demand for products will generally bring land into 
cultivation which would otherwise have remained idle, whereas a 
decrease in the demand for products will cause some poor land 
to be abandoned which would otherwise have remained in use. 
The margin of cultivation may change, however, for other reasons. 
When the prairies of the West were brought into cultivation the 
margin was extended in that direction, but this threw so many 
products on the market that some of the less productive lands of 
New England could no longer be advantageously cultivated. Much 
of this land was abandoned, and the margin of cultivation was 
contracted in this section. The extension of the margin on the 
western frontier and its contraction on the rocky hillsides of New 
England tended to counteract one another. There was, however, 
at the same time a growing demand for products, so that the ex- 
pansion in one direction more than made up for the contraction 
in the other. In other words, the total production actually in- 
creased, despite the diminution on some of the New England farm.s. 
Factors which extend the margin of cultivation. An increase 
in the supply of labor' which is seeking employment, unless coun- 
teracted by a corresponding increase in the demand for it else- 
where, will generally extend the margin of cultivation and cause 
land to be cultivated which would otherwise have remained idle. 
This problem may be approached from two points of view. In the 
first place, idle land may be regarded as an opportunity for idle 
men. When the supply of labor increases faster than the demand 
for it, the number of idle men increases. Some of these idle men 
are then crowded out onto the idle land. Even if they are not 
actually thrown out of work, the results are much the same. There 
is always a current of migration from the farms to the towns. 
When the labor market in the towns is overcrowded, country boys 
find fewer inducements to leave the country. Therefore they must 
perforce remain on the farms and cultivate the land. When larger 
inducements are offered in the towns, more of them leave the 
farms and less land can then be cultivated. 



2 86 ELEMENTARY ECONOMICS 

Another way of approaching this problem is by considering the 
wages of farm labor. When farm labor can be had at a low cost, 
some land can be cultivated profitably which could not be if the 
same kind of labor cost more. Wherever farm labor is cheap we 
actually find that there is little land going to waste except the 
very poorest. Where farm labor is expensive and hard to find 
we actually find fairly good land going to waste. Only the best 
land can be profitably cultivated by expensive labor. It must be 
remembered, however, that labor is not necessarily expensive 
merely because wages are high. Very efficient labor may be cheap 
even though it is paid high wages, and very inefficient labor may 
be expensive even though it works for low wages. With this ex- 
planation it ought to be clear that, with a given demand for farm 
products, poorer land can be cultivated if labor is abundant and 
cheap than would be profitable if it were scarce and dear. 

Different grades of land. A partial illustration of the doctrine 
of rent can be found in a study of the following table and the 
explanation which follows it. It is only a partial explanation, 
however, because it omits the law of diminishing returns. This lack 
will be corrected in a later explanation. 

Grade A, yielding looo units of product to loo units of labor. 
Grade B, yielding 900 units of product to 100 units of labor. 
Grade C, yielding 800 units of product to 100 units of labor. 
Grade D, yielding 700 units of product to 100 units of labor. 
Grade E, yielding 600 units of product to 100 units of labor. 

Let us assume a miniature community possessing five grades of 
land, as indicated in the above table. On the best grade of land, 
which is of limited extent, 100 units of labor will produce 1000 
units of product; on the next grade, 900 units of product; on 
the next, 800 units of product ; etc. If the demand of the com- 
munity were for only 1000 units of product and there were only 
100 units of labor, only the best grade of land could be used. 
Until it was all in use there would be no rent. But if the popu- 
lation were to increase so that there was an increase in the demand 
for products and also in the supply of labor, Grade A would' not 



THE RENT OF LAND 287 

continue to be sufficient. If, for example, the demand were to 
increase so that 1500 units of product were needed, some of it 
would have to be produced on the second grade of land, which 
would thus be the marginal land. On this marginal grade, how- 
ever, each unit of labor would produce only nine units of product, 
whereas on the best grade it would produce ten units. Clearly 
each producer would rather work on Grade A than on Grade B. 
Because of this preference he can be persuaded to pay something 
for the privilege of working on Grade A. Approximately one unit 
of product for each unit of labor would be paid for the privilege 
of farming on Grade A. An owner of a portion of Grade A who 
works it himself is better off than an owner of a portion of 
Grade B. This excess of his income over that of an equally good 
worker on Grade B is rent just as truly as though he received it 
in cash from a tenant. 

If the demand for products continues to increase until it re- 
quires 2500 units of product, some of Grade C will have to be 
brought into use. This would now be the marginal grade. On 
Grade C, however, each unit of labor produces only eight units of 
product. Rather than work on this land, producers would be 
willing to pay something for the privilege of working on either 
Grade A or Grade B. Each unit of labor would be willing to pay 
approximately- two units of product for the privilege of working a 
portion of Grade A, or one unit for the privilege of working a 
portion of Grade B, rather than be forced to cultivate land of 
Grade C. In either case it would have as much left as it would 
have if it got the whole of the product on Grade C without any 
deduction for rent. ~ If we go on assuming an increase in the 
demands for products and in the number of units of labor 
available for the cultivation of land, we shall find each of the 
Grades D and E in succession brought into cultivation, and 
the rent going up correspondingly on every grade except the 
marginal one. 

Relation of diminishing returns to rent. This explanation, 
however, is incomplete, as any explanation of rent is incomplete 
unless it takes into account the law of diminishinsr returns. 



288 ELEMENTARY ECONOMICS 

Even on the best land — in fact, on any grade of land — different 
applications of labor and capital produce different results. After 
a certain quantity of labor and capital have been applied to the 
cultivation of a given piece of land, further increase in the labor 
and capital does not yield proportionately increased returns.^ If 
this were not true, it would never be necessary to cultivate any but 
the best grade of land. If, for example, 200 units of labor on 
Grade A of the land described in the table on page 286 would 
produce 2000 units of product, that would be better than to spread 
it over both Grades A and B, where it would produce only 1900 
units of product. Again, if 300 units of labor would produce 3000 
units of product, and 400 units of labor 4000 units of product, and 
so on indefinitely, we should have what are called constant returns 
as opposed to diminishing returns. If constant returns could be 
secured indefinitely, as stated above, it would never be advisable 
to cultivate any land but Grade A of our illustration. 

But the simple and well-known fact is that increasing appli- 
cations of labor and capital to the same land do not yield constant 
returns, much less increasing returns. Instead of 200 units of labor 
yielding 2000 units of product on Grade A, and 300 units of labor 
yielding 3000 units of product, it is more likely that 200 units of 
labor would yield 1800 units of product, and 300 units of labor 
2400 units of product, or some such quantity. If that were the 
case, it would be better to take Grades B and C into cultivation 
than to put all the increasing labor supply onto Grade A. Unless 
something like this rate of diminution in the returns should 
result, the inferior grades would never come into use at all. 

The law of rent. The rent of a piece of land, therefore, is 
determined by the difference between what can normally be pro- 
duced upon it and what an equal amount of labor and capital 
can produce in less advantageous positions still open to them. 
These less advantageous positions may be found either by going 
onto the inferior lands still uncultivated or by crowding onto land 
already cultivated. 

1 As shown in Chapter XXX, on the Law of Variable Proportions. 



THE RENT OF LAND 289 

EXERCISES 

1. What is meant by the rent of land? How does it differ from 
the selling price? 

2. Why is rent paid? 

3. Would there be any rent if all land were equally desirable and 
of unlimited extent? 

4. If land were of unlimited extent, but some tracts were more 
desirable than other tracts, would there be rent? 

6. How much rent, under these conditions, would anyone pay for 
a good tract? 

6. What are the conditions which make one tract of land more 
desirable than another of the same size? 

7. What is meant by the margin of cultivation? 

8. What are some of the things which would cause the margin of 
cultivation to be extended? 

9. If the best grade of land yielded constant or increasing returns, 
instead of diminishing returns, would there ever be any occasion for 
cultivating an inferior grade of land? 



CHAPTER XXXIV 
INTEREST AND THE DEMAND FOR CAPITAL 

What is interest ? One of the most difficult and elusive of all 
problems in economics is that of the interest of capital. Interest 
may be defined as the income which goes to the owner of capital, 
whether he uses it in his own business or lends it to somebody 
else. This income may take any one of several forms. The most 
common and clearly understood form is where a definite sum of 
value, represented usually by money, is lent by the owner to 
someone else. The borrower, in return for the loan, eventually 
pays back not only the principal but a stated sum or percentage of 
the principal year by year. But the purpose of the borrower was 
not ultimately to secure money. Money is to him only a means of 
purchasing something which he really wants, and if he can make 
the purchases without actually handling the money his purpose 
is answered just as well. 

In other cases the capitalist may transfer to the borrower, not 
purchasing power, but the material goods which the lender desires 
and which he would buy if he were given the purchasing power ; 
meanwhile a definite sum is to be paid at stated periods for. 
their use. 

This sum is frequently called rent rather than interest, and 
there are some reasons for this custom. In the first place, the sum 
which is paid in the form of money for the use of a group of 
material objects cannot be reduced to a percentage basis until 
those objects are evaluated and their quantities stated in terms of 
value. If, however, the buildings are appraised and their value 
stated, then it is possible to reduce the annual payment for their 
use to a percentage basis. Unless the transaction takes this form, 
it is more convenient to say that the borrower is paying rent than 
to say that he is paying interest. The chief reason for calling it 

290 



INTEREST AND THE DEMAND FOR CAPITAL 291 

interest is that economists have formed the habit of speaking of 
rent as that which is paid for the use of land, and of interest as 
that which is paid for the use of capital. 

Distinction between interest and profits. In still other cases 
the income of the capitalist may be secured from the use of capital 
in his own business. This, however, is sometimes difficult to dis- 
tinguish from profits. Economists generally distinguish between 
interest and profits in this way: the business man who has his 
own capital invested in his business is allowed the current rate of 
interest on that investment ; if he labors or puts in his time 
supervising the business, he is also allowed a salary or wages of 
superintendence ; if he has anything left over after allowing him- 
self interest and wages, this surplus is called profit or profits. 

If he has not been particularly successful the profits may be 
negative ; in other words, he may incur a loss. That means that 
his total income may not be as great as it would have been if he 
had gone out of business, lent his capital at interest, and hired 
out at a salary as a superintendent. 

Interest, therefore, as it is generally defined, includes (i) that 
which the owner receives for the use of a fund of purchasing 
power which he transfers to a borrower; (2) that which he 
receives for the use of material goods, buildings, tools, equip- 
ments, etc., which he permits the borrower to use for a stated 
period; and (3) that which he receives in return for the capital 
which he owns and which he uses, or has invested, in his own 
business. 

Why is interest paid? The problem of interest, thus defined, 
divides itself into two parts : first. Why is interest paid ? second. 
What determines the rate of interest ? One answer to the first ques- 
tion is that capital is productive. This could apply only to what 
we have defined as productive as opposed to acquisitive capital. 

If tools are useful it is proper to ask. For what are they useful ? 
They are useful for production, not for consumption. With an 
adequate equipment of tools one can produce more than with an 
inadequate equipment. The formula "More and better tools, 
more production; fewer tools or poorer tools, less production" 



2 92 ELEMENTARY ECONOMICS 

supplies the farmer and the business man with a good reason for 
wanting more tools and being willing to pay for them. 

In any given situation, with any given type of equipment, find 
out how much you can produce without any particular unit, and 
then how much you can produce with it, and you have a measure 
of the productivity of that unit in that situation. At any rate, 
it is a fair test as to how much that unit would be worth when 
added to the rest of the equipment. Apply this test to each and 
every kind of capital required, not only on farms but in shops and 
factories, railroads, stores, etc., and we get an idea of the test of 
the usefulness, or productivity, of capital. 

Here we must repeat a caution which was given in the discus- 
sion of value. We are not to discuss the productiveness of labor 
in general or of capital in general, any more than we are to dis- 
cuss, under the problem of value, the utility of bread in general, 
meat in general, or water in general. We are always concerned 
with definite units which may be added to or subtracted from the 
existing supply. Wherever any producer finds that he could use 
more capital of any form advantageously, he has a perfectly good 
reason for trying to get an additional unit of that particular kind 
of capital. Whether we call it the productivity of the unit of 
capital or merely its usefulness does not matter. 

The opposite method of reasoning is involved in the statement 
that if there were no labor, capital could not produce anything. 
This is dealing with labor in general and capital in general. It is 
likewise true, of course, that if there were not any capital, labor 
would not be able to produce very much during the next month 
or the next year, — not, in fact, until it had equipped itself with 
a new supply of tools. 

When we speak of the productivity of capital we do not mean 
that capital is productive under all possible circumstances, regard- 
less of the surroundings. Neither is labor productive in that sense ; 
it has to be located where there is at least land available, and in 
order that it may be very productive it must have an adequate 
supply of tools. In short, nothing is productive when it stands 
alone, unrelated to many other things in the surrounding universe. 



INTEREST AND THE DEMAND FOR CAPITAL 293 

Labor, of course, is a more fundamental and primary agent of 
production than capital, since capital is itself the result of labor, 
thrift, and enterprise. But we are not, in a practical work on 
economics, dealing with an absolutely primitive economic situ- 
ation; we are dealing rather with the conditions which we find all 
around us, and with the specific needs of specific industries and 
specific communities. 

What does capital include ? As capital was defined in the 
chapter devoted to that subject, it includes something more than 
producers' goods. It includes consumers' goods which are lent, 
rented, or hired in order to secure income for their owner. In these 
cases the income of the capitalist is not due to the productivity of 
the consumers' goods thus lent ; it is due rather to their usefulness 
in consumption. He who builds a dwelling house, or hires some- 
one else to build it, and then rents it to an occupant is virtually 
selling the flow of utilities which the house furnishes to the occu- 
pant during a definite period of time. These utilities are in the 
form of comfort, convenience, luxury, and even style in some 
cases ; but the problem of interest is much the same, in the last 
analysis, whether the capital be productive or acquisitive. 

Why capital is wanted. The productivity of capital, or the 
advantage of having the use of it, is subject to the principle of 
marginal productivity, as is the productivity of labor and land. 
If you increase the number of instruments of a given kind in any 
industrial establishment, leaving everything else in the establish- 
ment the same as before, you may, within limits, increase the total 
product of the establishment somewhat, but you will not increase 
the product in proportion to the increase in the number of instru- 
ments in question. If you increase all the instruments in a given 
industrial establishment without increasing the labor at the same 
time, each instrument will be used a little less intensively, or it 
will be idle a greater number of minutes per day, simply because 
of the scarcity of labor. On the other hand, of course, if you 
diminish the number of instruments or the total equipment, leav- 
ing the amount of labor the same, each instrument, or each unit 
of the equipment, will have to be used more intensively. 



2 94 ELEMENTARY ECONOMICS 

The productivity of capital decreases, other things being 
equal, as its quantity increases. Take a farm, for example. With 
a given labor force, the greater the number and variety of tools and 
implements, the less intensively each one is likely to be used. On 
the other hand, the smaller the number, the more intensively each 
is likely to be used. There are many farms on which it is found 
that there are such a number and variety of tools and implements 
that the farmer is really not getting any interest on a large part 
of his investment. Some expensive tools are idle so much of the 
year that they do not pay for themselves ; that is, the farmer never 
gets back the original price which he paid, to say nothing about 
getting interest on that price. On the other hand, there are other 
farms so poorly equipped that every tool is used very inten- 
sively, and it would be money in the farmer's pocket to invest 
in additional equipment. For every dollar which he puts into 
more and better tools, he would get back not only the original cost 
price but something in addition which could be called interest on 
the investment. 

That which is found to happen on farms is found to happen also 
in larger industrial establishments, factories, railroads, etc. That 
which is true of an individual farm, shop, or other business estab- 
lishment is true also of the community as a whole. If, for example, 
there are very few plows in a given community where there is an 
abundance of land, many laborers, and much other capital besides 
plows, each and every plow would be a matter of considerable 
importance ; it would be in general demand and would be used a 
great number of days in the year. Under these conditions you 
could say of that community, "One more plow, considerably more 
product; one less plow, considerably less product"; in short, the 
marginal productivity, in that particular community, of that form 
of capital called plows would be high. If, on the other hand, 
there were a great number and variety of plows in the community, 
other factors remaining the same, each plow would be a matter 
of much less importance ; each one would be idle a greater number 
of days in the year. Then you could say, "One more plow, com- 
paratively little more product ; one less plow, comparatively little 



INTEREST AND THE DEMAND FOR CAPITAL 295 

less product " ; in short, the marginal productivity of plows would 
be low and their value would also be low. 

Applying the same method of reasoning to other forms of capital 
or to all forms of capital, we reach the same conclusions. An 
abundance of all forms of capital, land and labor remaining 
the same, would give a low marginal productivity to capital ; 
whereas a scarcity of all forms of capital, land and labor remain- 
ing the same, would give a high productivity to all forms of 
capital. This would show itself in the case of liquid, or un- 
invested, capital. Where all forms of capital are scarce, one 
hundred dollars invested in tools would add considerably to 
the productivity of the community ; but where all forms of 
capital are very abundant, one hundred dollars invested in addi- 
tional tools would be of comparatively little value. 

EXERCISES 

1. What is interest? 

2. What is the distinction between rent and interest? 

3. Is it necessary that interest be paid? 

4. If there were no saving, would there be any capital? 

5. Do people like to save? 

6. If they do not like to save, how can they be induced to do so ? 

7. What is capital? Why is it needed? 

8. Is any more needed than we now have? 

9. If the community had all the capital it needed, would there be 
any such thing as interest? 



CHAPTER XXXV 
INTEREST AND THE SUPPLY OF CAPITAL 

Why capital is scarce. Seeing that the productivity of capital, 
or its advantageous use, diminishes as the supply of capital in- 
creases relatively to other factors, and increases as the supply of 
capital diminishes relatively to other factors, it is quite important 
that we should be able to account for the supply of capital as well 
as for its demand. Its demand, as has already been suggested, is 
based upon its desirability in production ; that is, upon its pro- 
ductivity or the opportunity for its advantageous use. Unless, 
therefore, the supply were in some way limited, capital might be- 
come so abundant as to leave it with no marginal productivity. 
We found, when we were discussing the value of commodities, that 
the cost of producing them operated as a check on production and 
kept the supply within such limits as would give them a price 
approximately sufficient to pay the cost of production. Some 
factor must be found which will limit the supply of capital. 

Two forms of cost: (1) The original cost of production. 
There are two factors which are obviously at work. One is the 
mere cost of producing the capital goods ; the other is the cost 
of waiting, or the disinclination which the average individual feels 
toward waiting. The cost of producing tools needs very little dis- 
cussion. Unless the farmer's plow will return him, before it is 
worn out, enough to replace the price which he originally paid for 
it, he will of course have no motive for paying that price. 

(2) The irksomeness of waiting. Suppose that the plow which 
cost fifty dollars will return the farmer only five dollars a year 
and will last ten years ; it then just replaces its original cost ; 
the farmer will have got back at the end of ten years the money 
which he put into it, and no more. Meanwhile he has had to wait 
ten years. If he did not mind waiting, — if waiting were not in 

296 



INTEREST AND THE SUPPLY OF CAPITAL 297 

the slightest degree irksome to him, — he would probably be willing 
to buy a plow under such circumstances, though there would be 
neither loss nor gain. If, however, he does not like to wait, — 
if he prefers present enjoyment to future enjoyment, — then he 
would hold on to his fifty dollars in the first place rather than 
spend it for something which would return fifty dollars in ten 
years' time. 

Under these circumstances he will certainly not buy the plow 
unless he has so few plows as to give a higher marginal produc- 
tivity than that which we have been discussing. But if he has so 
few plows that the possession of an additional plow will in the 
course of ten years add one hundred dollars to his income, he will 
add fifty dollars to his wealth during the ten-year period, — that 
is to say, fifty dollars will go to replace the purchase price of the 
plow ; the other fifty dollars is surplus. This and this alone is 
interest, and a rather high rate of interest ; namely, 10 per cent. 
But if every farmer is likewise disinclined to wait, the market for 
plows will be limited. Only as many will be purchased as will yield 
a return large enough to more than pay the purchase price. In 
other words, farmers in general will get some interest on that which 
they invest in plows. 

Why the present value of a productive agent is less than the 
future value of all its products. Now, as a matter of fact, people 
do not like to wait. Waiting is to some quite as irksome as work- 
ing. It is also quite as necessary to efficient production. Anything, 
whether it be working, waiting, or risking, which is necessary to 
efficient production, and which at the same time is irksome, must 
be paid for. The fact that it is necessary for production furnishes 
a sufficient motive for paying for it ; the fact that it is irksome 
makes it necessary to pay for it, because men will not otherwise per- 
form this function. In order that there may be an adequate supply 
of tools, which is necessary for efficient production, there must be 
waiting. Labor must be performed in the making of the tools, 
and then somebody must wait until they have been used for a num- 
ber of years in order to get back from their use the equivalent 
of that which was originally expended in making them. If the 



298 ELEMENTARY ECONOMICS 

laborers who make the tools are not themselves willing to wait, 
they may sell them to someone else, who will then undertake to 
wait for their products to mature. 

Normal price must, in the long run, cover both forms of 
cost. If both the laborers who make the tools and the one who 
purchases them are disinclined to wait, the market price of the 
tools will have to be something less than the sum of their future 
earnings. The laborers, being disinclined to wait, will be willing 
to sell for a cash price somewhat lower than the total sum of the 
future earnings, and the purchaser will not be willing to pay a 
price which would equal the sum total of the future earnings. In 
the price-making process, therefore, the capital goods must neces- 
sarily sell for less than the sum of the future earnings. The buyer 
who holds them during their lifetime finds himself in possession of 
a surplus, which is his compensation for waiting. 

Though it is not likely that anyone would be willing to wait 
ten years to get his money back, he might be willing to wait if 
he could get back not only the original sum of money but a surplus 
besides. The farmer, for example, might be willing to pay thirty 
dollars for a plow which would in the course of ten years earn him 
fifty dollars. The twenty dollars surplus would be interest. The 
problem, as it presents itself to the farmer who is contemplating 
investing money in a plow, is very much the same as the problem 
which presents itself to a lender who is contemplating lending 
money to someone else. As a rule he prefers to keep his money 
rather than lend it, unless he can get a surplus by lending it. 
Every form of investment involves the same problem. 

Not all waiting is irksome. While it is true that, as a general 
rule, men are disinclined toward waiting (that is, they prefer 
present to future goods), still there is a certain amount of waiting 
which takes place normally without any sacrifice. There would 
be some saving even if no interest could be secured on savings. 
In fact, it is probable that a considerable amount of saving would 
take place even if men were compelled to hire vaults or storage 
places in which to keep their savings. In this case savings could 
be said to yield negative interest rather than positive interest. 



INTEREST AND THE SUPPLY OF CAPITAL 299 

Anyone who is gifted with a moderate degree of foresight will 
look ahead and consider the possibilities of future emergencies. 
He may therefore lay up for a rainy day, for sickness, or for old 
age, even though there is no possibility whatever of securing in- 
terest on his savings. Taking the whole community, especially if 
it contains a great many well-to-do people, a considerable mass of 
wealth would be saved for this reason alone. This kind of saving 
may be said, therefore, to involve no cost ; and yet those who save 
in this way are able to secure interest on their savings, along with 
those who save at considerable sacrifice. 

Some capital accumulated without expectation of interest. 
If those sums which are saved in this way without sacrifice were 
sufficient to meet the demands of all communities for capital, such 
a thing as interest would not exist ; that is to say, if so much were 
saved in this way, and there were so few opportunities for using 
capital as to reduce its marginal productivity to the minimum, 
capital would practically be a drug on the market. If, however, 
the opportunities for the productive use of capital are so great 
that more capital is demanded than can be saved without cost, 
then, in order to induce further saving, a surplus must be paid 
for its use. 

Interest a part of the general law of value and price. The 
price which is paid for the use of capital comes under the same law 
as the price which is paid for anything else. In the chapter on 
Scarcity it was pointed out that some goods are produced, under 
certain circumstances, practically without cost. Trout, where the 
fishing is good, are caught for the pleasure of the sport. If the 
number of trout that can be caught for pleasure is sufficient to 
satiate the desire for trout, then trout command no price ; if this 
quantity is not sufficient to satiate the desire, and consumers are 
demanding more, then they must begin to pay a price to induce 
other fishermen to undertake the work of providing an adequate 
supply. The law here is the same as that which controls capital. 
Some capital will be accumulated without cost. There is probably 
no community in existence, however, in which enough, capital to 
supply all demands is provided in this way. It is therefore 



300 ELEMENTARY ECONOMICS 

necessary for all who need it to offer a price in order to induce a 
larger volume of saving than would take place if no interest were 
paid ; that is, no price for the use of capital. 

The cost of saving. The cost of saving is, like other forms of 
cost, ultimately a matter of psychology. Among people who are 
gifted with a large degree of forethought, saving is less irksome 
than it is among people who live mainly in the present. A com- 
munity with little forethought is therefore always a community in 
which interest rates are high, because there will be small accumula- 
tions of capital and, the supply being small, there is great need 
for more. It is the need for more of a thing which induces people 
to pay a price for it. 

The functional theory of interest. This theory of interest may 
be called a functional theory of interest, to correspond with the 
functional theory of value and the functional theory of wages, 
which have already been outlined. The function of a high price, 
as has been pointed out, is to call forth a larger supply ; the func- 
tion of high wages is to induce a larger supply of the labor which 
receives high wages ; and the function of a high rate of interest is 
to call forth a larger supply of capital for which interest is paid. 
A community that needs more capital can get it only by inducing 
larger savings. These larger savings may be secured either by 
compulsion (that is, by taking a part of the social income by au- 
thority and setting it aside) or by attraction (that is, by offering 
a reward for saving). There is no other possible way that has 
ever been suggested, even on paper, of accomplishing this result. 



EXERCISES 

1. Why is capital scarce? 

2. If everybody liked to save, would capital be scarce ? 

3. If everybody had all the capital he needed, would he be willing 
to pay interest ? 

4. Why does he not have all he needs? 

5. Is it always disagreeable to save? 

6. Under what circumstances does it become disagreeable to save? 



CHAPTER XXXVI 

PROFITS 

What are profits ? Profits may be broadly defined as the 
income of the independent business man who receives neither 
stipulated wages, rent, nor interest. In a somewhat narrower sense 
they include whatever he has left over after he has allowed him- 
self interest on his own capital, rent for his own land, and wages 
for his own labor. This would seem to narrow the meaning of 
profits down to the reward for taking risk, though risk must be 
defined rather broadly. The enterpriser, as the independent busi- 
ness may with fair accuracy be called, is essentially the man 
who undertakes something and relieves others of a part at least of 
the risk which they would otherwise have to take. 

It would be quite possible, for example, for a group of laboring 
men to borrow capital, build their own factory, and run it. But 
if they did so they would always be in danger of losing not only 
what they themselves had invested but even their wages for a 
time ; that is to say, if there should come a bad season, when the 
demand for products fell off, they might have to work for very low 
wages or for none at all. If some individual or group of individ- 
uals will undertake to run the business for them and guarantee 
them a certain fixed rate of wages, they are relieved of a part of 
that risk. 

Profits as payment for insurance. Again, the men who furnish 
the capital may jointly assume all the risks of the enterprise. 
They may, however, be in part relieved by having one individual 
or group of individuals undertake the business and guarantee them 
interest on their capital. In such a case, however, the enterprisers 
usually have to invest some of their own capital, and their own 
capital is put in the most hazardous position. This is virtually 
the distinction between common stock and preferred stock in a 

301 



302 ELEMENTARY ECONOMICS 

corporation. Those who own the common stock take the greater 
risk. So long as the enterprise is running at all, the owners of 
the preferred stock must get their interest, whether the owners 
of the common stock get anything or not ; but if the enterprise 
is very successful, the owners of the common stock get larger 
returns than the owners of the preferred stock. These larger re- 
turns over and above the rate of interest will be called profits. 

The lure of an enterprise. In a smaller business, run, let us 
say, by an individual rather than by a corporation, the individual 
may borrow a part of his capital, and in this case, so long as he 
is in business at all, he must pay interest on what he borrows, 
whether he has anything left for himself or not. In case the busi- 
ness succeeds very well he gets a surplus which may be called 
profit. The lender of borrowed capital gets no more than the stipu- 
lated rate of interest. It is the function of the independent busi- 
ness man or the enterpriser to insure the other participants in the 
industry against at least a part of their risk. Any income which 
the insurer gets over and above the normal rate of interest on the 
capital which he himself puts in may be called profit. This is the 
lure which induces men to undertake risks of this kind. 

This suggests a functional theory of profits which fits in with 
the functional theories of value, wages, and interest already 
described in the previous chapters. The function of high profits is 
to induce a large number of men to undertake independent enter- 
prises. Where a larger number of such enterprises are needed, there 
are only two ways of getting them started. One is for the com- 
munity as a whole to take a part of the social income and by au- 
thority invest it in new enterprises ; the other is to offer a special 
inducement to private individuals to undertake the new enterprises 
voluntarily. This is usually done by the offer, on the open market, 
of high prices for the products of the enterprise. 

Necessity of taking risk. Risk-taking is no more meritorious 
in itself than is waiting or working. It is meritorious only when it 
results in increased production and well-being. Still, the well- 
being of society or the increased production of the goods which 
society needs makes it absolutely necessary that some risks should 



PROFITS 303 

be taken. Risk is therefore something which cannot be avoided. 
These risks are of many kinds and degrees. The tastes of the 
people may change so that the thing which is to be produced 
may be no longer desired. Some new invention may render 
obsolete the processes used and the machinery which has been 
installed. Strikes, insurrections, wars, and unforeseen physical 
calamities, such as fires, storms, and earthquakes, must also be 
taking into account. Risk-taking is therefore as necessary as 
working or waiting in order to get effective production under way. 

Irksomeness of risk. Unless, however, risk-taking were in 
some way irksome or disagreeable it would not deter men from 
entering business, and there would be nothing here that would have 
to be paid for. That is to say, if people liked to take risks there 
would be no hesitancy in entering a risky occupation. It would 
therefore not be necessary to offer a reward to induce men to 
enter it. But since risk-taking is irksome or disagreeable, since 
men would rather not hazard their accumulations and their present 
income, they must be paid something as a lure, or attraction, to 
overcome this disinclination. The reason here is precisely the same 
as the reason for paying wages or interest, or for paying the price 
of any commodity. The function of price, in a free country, is 
to overcome the disinclination to work, wait, or take risks. 

Relation of the market to the mathematical value of a risk. 
In the case of an enterprise which does not appeal to the gambling 
instinct, men are generally so reluctant to invest that the market 
value of the risk is usually somewhat less than its mathematical 
value. Men w?io persist in buying such risks inevitably gain if 
they continue long enough and if they are not ruined by their early 
losses. In the class of risks which appeal to the gambling instinct, 
the more one invests the more certain one is to lose. If one were 
to buy all the lottery tickets, one would be absolutely certain to 
lose, because the management sees to it that the price of all the 
tickets exceeds the value of all the prizes. In the other class of 
risks — namely, those which do not appeal to the gambling in- 
stinct — the market value is less than the mathematical value, 
as already stated. It follows from this that if you were to buy all 



304 ELEMENTARY ECONOMICS 

such risks, you would be absolutely certain to gain, for the sum 
total of the market values is less than the sum total of all the 
mathematical or economic values. Those who invest in the gam- 
blers' risk as a class lose rather than gain ; those who invest in 
the ordinary business risks as a class gain rather than lose. 

The business man the chief bargainer. Every participant in 
a competitive enterprise is more or less a bargainer, but the inde- 
pendent business man is the chief bargainer of all. When the 
laboring man has bargained for a rate of wages, the rest of his 
work consists not in bargaining but in working; and when the 
capitalist has bargained for a rate of interest, that is the end of 
his bargaining ; so with the landlord. But the independent busi- 
ness man is the bargainer per se ; he bargains for everything, — 
his raw materials, his help, his capital, — and he also bargains with 
the purchasers of the product. He is the unbought buyer of every- 
thing, and the unsold seller of everything connected with the 
business. It therefore happens that skill in bargaining is one of 
the greatest elements in his success in securing profits. Bargain- 
ing, however, consists, in the first place, in investing, and the 
investment of capital is a very delicate operation. To invest 
successfully one must foresee the future needs of the community 
as expressed in the demands of the market. To err at this point 
is to fail. This is not only one of the most delicate but one of the 
most important of all economic occupations. Whether the pro- 
ductive power of the country is conserved or wasted depends upon 
the wisdom of its investors. 

Because of the disinclination of the average man toward taking 
the ordinary business risk, the competition is somewhat intense for 
the safe positions of the laborer and the lender of capital. The 
intensity of this competition tends to keep their shares somewhat 
lower than they would otherwise be, but this disinclination makes 
the competition somewhat less intense among the business men 
who have to assume the chief risks. This, in turn, leaves them 
with somewhat larger incomes than they would get if the risks 
were less irksome and the competition more intense. The surplus 
income which comes to them in this way is called profits. 



PROFITS 305 

EXERCISES 

1. What are profits? 

2. In what sense does the independent business man insure others 
who participate in production? 

3. Is there any reason why men should be paid for taking risk ? 

4. Suppose there is something that cannot be produced without 
risk, and also that men do not like to take risks, would it be neces- 
sary then to pay for risk-taking? 

5. Does it make any difference what kind of risk it is? 

6. Are men generally disinclined toward taking a gambling risk ? 



CHAPTER XXXVII 

THE GOVERNMENT'S SHARE 

Public revenue. A certain share of the products of the country, 

sometimes called the national income, must go to the support of 

government. Literally it goes to pay the salaries of those people 

who are doing the work of government instead of the direct work of 

production. The government's share is usually called public revenue. 

Classification of revenues. There are various sources of public 

revenue, but in modern times the chief source is taxation. 

Henry C. Adams, in his work on Finance,^ gives the following 

classification : 

r Public domains 

Public industries 

Gratuities or gifts, or treasure-trove 

Confiscations and indemnities 

f Taxes 

Public J Fees 

„ 1 Derivative revenue i ^ 

Revenue Assessments 

Fines and penalties 

r Sale of bonds or other forms of com- 

^ Anticipatory revenue-^ mercial credit 

(^Treasury notes 



r Direct revenue < 



In former times the public domain was made to supply a large 
■part of the revenue for the government. In fact, under the feudal 
system, property in land and something resembling public office 
went together. The king had his own demesne ; so likewise did 
his retainers and all members of the nobility. The nobility formed 
the chief fighting class and were also the administrators of local 
government, each deriving his income from the lands which were 
granted to him. 



1 The Science of Finance, p. 227. 
306 



New York, li 



THE GOVERNMENT'S SHARE 307 

Public industries have not figured very largely as sources of 
public revenue, unless royalties from mines could be put in this 
class. A number of European cities have derived portions of their 
revenue from their own water, gas, and electric-light plants. 
Gratuities and gifts, as well as treasure-trove, are negligible sources 
nowadays. Confiscations and indemnities belong to a lower stage 
of civilization, where militancy and the lust for conquest prevail. 
In all civilized governments taxes have become the chief source of 
revenue — fees, assessments, fines, and penalties forming subsidiary 
sources. 

What is a tax ? A tax is a compulsory payment to the govern- 
ment for which the government does not return to the individual 
payer a commodity or a service. The money, for example, which 
one pays for a postage stamp is not a tax ; it is rather a purchase 
of a service. Where a municipality owns its own water supply 
and charges water rates, these rates are not in any proper sense 
taxes ; they are, like the purchase of postage stamps, payments 
for service. The same is true of the price paid for any direct 
service which the government renders. 

To be sure, the government renders general services for all its 
taxes ; but in the case of a tax there is no attempt to apportion the 
payment exacted of the individual to the benefit which he as an 
individual receives. Doubtless everyone receives some advantages 
from the existence of an army or a navy, of courts, or of police- 
men ; but his tax is not of the nature of a purchase, since he must 
pay the tax whether he thinks he is getting anything in return for 
it or not, and the amount of the tax bears no relation whatever to 
what he thinks the value of the service of the state may be to him. 

Some taxes are absolutely compulsory ; others are compulsory 
only conditionally. An income tax, an inheritance tax, or a poll 
tax is absolutely compulsory. The individual has no choice in the 
matter. An excise or a tariff duty may be avoided by avoiding 
the use of the articles on which these duties are levied. One may 
avoid the excise duty on tobacco, for example, by refraining from 
the use of tobacco. And yet when one pays this tax, he is not 
receiving from the government a service, since the government did 



3o8 ELEMENTARY ECONOMICS 

not produce the tobacco but only charges the manufacturer or the 
dealer for the privilege of manufacturing and selling. 

So-called indirect taxes. The taxes just described are generally 
called indirect taxes. In case of a tariff duty, for example, the 
importer of the dutiable article pays the tax directly to the gov- 
ernment. From his point of view it is just as direct as any tax. 
It is the general theory, however, that the consumers of the im- 
ported articles pay the tax in the form of higher prices. In cases 
where that happens the consumers may be said to pay the tax 
indirectly. This is by no means always the case, however, and it 
is not always easy to determine who does actually pay the tariff 
duty. It is therefore doubtful whether or not the term "indirect 
taxation" should be retained in economics. 

All real taxes are direct in the sense that the payers pay their 
money directly to the government. In some cases, however, the 
payer is able to shift the tax to somebody else by charging a higher 
price for a product or by paying a lower price to the one from 
whom he himself buys the product. The manufacturer of alcoholic 
liquor pays his excise duty as directly to the government as any 
other tax, but if he charges the consumer a higher price for the 
liquor, the consumer is then said to pay the tax indirectly. The 
manufacturer may also pay the producer of the raw materials a 
lower price, and in that case it is the producer who pays the tax, 
in part at least. If the manufacturer carries a part of the bur- 
den which he is unable to shift to someone else, he himself bears 
that burden directly, not indirectly. 

Taxes and monopoly price. A common abuse of the word 
"taxation" is to apply it to monopoly price by saying that the 
monopoly taxes the people. It is sufficient in a case of this kind 
to say that the monopoly charges too high a price, or a monopoly 
price; bringing in the word "tax" does not add anything to the 
clearness of the discussion. Where the monopoly sells a commodr 
ity or a service, even though it sells it above cost, the individual 
gets what he thinks ought to be the equivalent of what he pays ; 
otherwise he would not purchase the article. Similarly, the gov- 
ernment might, if it chose, charge more for postage stamps 



THE GOVERNMENT'S SHARE 309 

than the cost of carrying the parcels. This would not properly 
be called a tax ; the proper expression would be to say that the 
government is charging a high price. 

Compulsion in public business. Even where the government 
derives a part of its revenue from a public industry, the element 
of compulsion is generally present. If the revenue from the 
industry does not pay expenses, the industry cannot become 
bankrupt and its affairs be wound up by legal proceedings. The 
government can merely tax the people or derive an enforced 
revenue from some other source to pay the deficit ; that is, it 
can use its power of compulsion to keep alive an unprofitable 
industry, whereas an individual or private corporation, lacking 
the power of compulsion, would have no power to keep its 
business alive. 

Again, it will generally be found that the government exer- 
cises some compulsion by excluding competitors from its own 
particular field. No one is allowed to compete directly with the 
Federal post office in carrying first-class mail. The government's 
power of compulsion is exercised in its own behalf. In fact, it 
is doubtful if there is a case on record where any government has 
succeeded in doing anything well on a purely voluntary basis. It 
has had to use its power of compulsion at some point or other 
in the enterprise. It has either raised funds by compulsion or ex- 
cluded competitors by compulsion, has repressed opposition and 
criticism by compulsion, or in some other way made use of this 
great advantage which it possesses over all private organizations, 
in order to insure its success. 

These observations are made not for the purpose of criticizing 
or opposing government enterprise, but merely in the interest of 
truth and accuracy. Government is compulsion ; and when prop- 
erly exercised, compulsion is beneficent. One of the great and 
really unsettled questions, however, is as to the limits within which 
compulsion is beneficent and beyond which it is interference. 

Earmarks of a good revenue system. Henry C. Adams gives 
the following as the marks of a good revenue system : ( i ) it must 
be adequate to the just wants of the state; (2) it must present 



310 ELEMENTARY ECONOMICS 

itself as a system and not as an aggregation of independent and 
unrelated facts; (3) in a federated government such as we have 
in the United States the revenue domain of one branch of the gov- 
ernment should not encroach upon the revenue domain of another 
in such a way as to bring confusion ; in other words, there must 
be harmony and balance between the central and local govern- 
ments, between the local governments themselves, and between 
the several organizations of local government; (4) it should 
provide for elasticity of the revenue at the point where elasticity 
is needed ; that is, the revenue must be capable of increase and 
decrease whenever and wherever it is needed. 

Double taxation. The second of these is of particular impor- 
tance in the United States of America. Paraphrasing the famous 
rule of the Donnybrook Fair, weTiave apparently followed the rule, 
^^ Wherever you see a thing, tax it." This has led to a great deal 
of confusion, — to double taxation in some cases and to complete 
escape from taxation in others. By double taxation is meant tax- 
ing an individual or different individuals twice for the same thing. 
If, for example, a farmer owns a piece of land and also has in his 
possession a piece of paper called a deed to the land, and if he is 
taxed once on the land and again on the deed to the land, that is 
obviously a case of double taxation. If, however, one farmer owns 
a piece of land and another owns a mortgage on it, the owner of 
the mortgage is virtually, if not literally, a part owner of the land. 
If, now, the farmer pays taxes on the full value of the land, and 
the mortgage owner pays on the full value of the mortgage, there is 
an equally clear case of double taxation. The double tax really 
falls on the farmer, because, where mortgages are taxed, the in- 
terest rates are made higher in order to recoup the lender for the 
tax which he has to pay. 

During the recent war our Federal government sold large num- 
bers of bonds bearing 3^ per cent interest. One of the arguments 
used in their favor was. that, since they were free from taxation, 
one received practically as much net income from them as he would 
receive on taxable property yielding nominally 5 per cent. This 
shows pretty clearly that taxes affect interest rates. 



THE GOVERNMENT'S SHARE 311 

Where mortgages are not taxed, the same argument would apply 
and would be effective. If in one state a lender is compelled to 
pay a i^ per cent tax on his mortgage, and in another state he 
does not have to pay any tax, if he is an honest man he would as 
lief lend at 3^ per cent in the latter state as at 5 per cent in the 
former. If he is dishonest, however, he may take his chances on 
avoiding taxation in the former, and if he succeeds he may receive 
his 5 per cent net. 

Again, a corporation may own certain amounts of visible prop- 
erty, while the shareholders have pieces of paper as evidences of 
their ownership of undivided shares of that property. If the visible 
property is taxed and the individuals are also taxed on the pieces 
of paper which they hold as evidences of ownership, the effect is 
very much the same as though the farmer were taxed on his 
farm and also on the deed which, like the share in a corporation, 
is only an evidence of ownership. 

Overlapping of tax systems. The third of these marks of a 
good system is also important in this country. The conflict of 
jurisdictions between Federal and state governments, and between 
the state governments themselves, has produced a great deal of 
confusion and also a great deal of double taxation. Various 
remedies for this situation have been proposed, among others the 
subdivision of the various sources of revenue, each grade of govern- 
ment being allowed its own particular source. 

The Federal government, for example, is by the Constitution 
given exclusive right to levy duties on imports. Since no state or 
municipality is permitted to enter this field, there is no confusion 
there. It has also been suggested that real-estate taxes should be 
left exclusively to the local governments, — municipalities, counties, 
and townships. It is thought by certain writers that licenses and 
franchises also should be left exclusively to local governments. 
Incomes and inheritances would seem to be suitable objects for 
state taxation. Stamp taxes of various sorts apparently must be 
left to the Federal government. 

No very clear dividing line has been generally agreed upon for 
the separation of Federal from state sources of revenue. Certain 



512 ELEMENTARY ECONOMICS 

writers of high authority hold that the income tax should belong 
exclusively to the states and that the Federal government should 
keep out of this field. Their views, however, have not received 
general public support. We already have duplication in this field ; 
that is, in most of our states we have income taxes in addition to 
the Federal income tax. 

Inelasticity of inheritance taxes. The inheritance tax is an 
excellent source of revenue, being very productive ; but it should, 
from the nature of the case, be a permanent tax not often' to be 
changed. In the course of a generation practically every estate 
will pass by inheritance and be taxed. But in any given year or 
decade only a certain percentage of them will pass by inheritance 
and be taxed. If, therefore, the tax is changed frequently, differ- 
ent estates will bear very different burdens. If, during a few 
years, a very high inheritance tax prevails, the few estates that 
pass by inheritance during those years will bear a heavy burden ; 
and if, during the next few years, there is a very low tax, the 
estates which pass by inheritance during those years will bear a 
very light burden. 

Income tax. An income tax, however, may be changed fre- 
quently without injustice to individuals. Everyone who receives 
a taxable income is likely to receive it every year. The tax may be 
changed every year without showing any discrimination in favor 
of or against individuals. This would seem to make it necessary 
that an inheritance tax should be permanent and be the source of 
a considerable revenue, but that elasticity should be secured from 
an income tax, which may be changed frequently as occasion 
demands an increase or decrease of public revenue. 

General property tax. The characteristic form of American 
taxation, however, is what is known as the general-property tax. 
Nearly every state in the Union has had, either in its constitution 
or on its statute books, laws requiring the equal taxation of all 
forms of property. In many cases this has worked to the utter 
confusion of our financial system. One result is that visible prop- 
erty is taxed and invisible property escapes. The farmer's land 
and buildings, live stock and machinery, can scarcely be hidden, 



THE GOVERNMENT'S SHARE 313 

and the assessor finds them. Many of the intangible and invisible 
forms of property, however, are difficult to find and can frequently 
escape taxation. Strange as it may seem, many rural districts 
show a larger percentage of personal property and a smaller per- 
centage of real estate than most of our cities, because much of the 
farmer's personal property (machinery, tools, etc.) is of a kind that 
cannot well be hidden. No one really believes that farmers own a 
larger percentage of personal property and a smaller percentage 
of real estate than city people, and yet the assessors' books 
sometimes indicate that they do. 

Progressive taxation. Various expedients have been adopted 
to make taxes more just than they are under the crude general- 
property tax. Among these laws one of the most important is 
what is known as the graduated, or progressive, tax. This may 
apply either to general property, to incomes, or to inheritances. 
The principle of the progressive tax is that the larger the sum to 
be taxed, the higher the rate of taxation. To begin with, even an 
exemption operates to a slight extent as a progressive tax. An in- 
come tax which exempts, let us say, $2 000 from all taxation and 
taxes only the excess above $2000 is slightly progressive, even 
though it is nominally proportional. A tax of i per cent on the 
excess over $2000 would work somewhat as follows: On $3000 
the tax would be $10, which is one third of i per cent on the whole 
income ; on $4000 the tax would be $20, which is one half of i per 
cent on the whole income ; on $6000 the tax would be $40, which 
is two thirds of i per cent on the whole income. 

A genuinely progressive tax, however, proceeds farther than 
this. It begins, let us say, with a i per cent tax on the excess above 
$2000, I per cent more on the excess above $10,000, and i per- 
cent more on the excess above $50,000, and so on. Under this 
scheme, then, the individual who had an income of $60,000 a yeat 
would pay i per cent on $58,000 (the excess above $2000), 2 per 
cent on $50,000 (the excess above $10,000), and 3 per cent on 
$10,000 (the excess above $50,000), making a total of $1880. 
Whether the tax be an income tax, an inheritance tax, or a tax 
on general property, the principle of the graduated tax is the same. 



314 ELEMENTARY ECONOMICS 

Canons of taxation. Adam Smith, in his "Wealth of Nations," 
laid down what have since his day been called the canons of 
taxation. They are as follows : 

(i) The subjects of every state ought to contribute towards the 
support of the government, as nearly as possible, in proportion 
to their respective abilities ; that is, in proportion to the revenue 
which they respectively enjoy under the protectiori of the state. . . . 
(2) The tax which each individual is bound to pay ought to be certain, 
and not arbitrary. The time of payment, the manner of payment, 
the quantity to be paid, ought all to be clear and plain to the con- 
tributor, and to every other person. ... (3) Every tax ought to be 
levied at the time, or in the manner in which it is most likely to be 
convenient for the contributor to pay it. . . . (4) Every tax ought 
to be so contrived as both to take out and to keep out of the pockets 
of the people as little as possible over and above what it brings 
into the public treasury of the state.^ 

The first of these relates to the general question of justice ; the 
others are so obviously practical and expedient that there has 
never been any serious discussion of them. A great deal of dis- 
cussion, however, has centered round the first. Just what is meant 
by "in proportion to their respective abilities" has never been 
definitely decided. At first thought it sounds as though this 
meant proportional rather than progressive, or graduated, taxation. 
If we assume that a man's ability is in exact proportion to his in- 
come, then obviously if he pays in proportion to his ability he must 
pay in proportion to his income. But it is contended that a man's 
ability to pay increases more than in proportion to his income, 
and that therefore if he pays in proportion to his ability, he must 
pay a progressive, or graduated, tax on his income or his property. 
That there is some justification for this opinion is evidenced by the 
almost universal practice of exempting a certain minimum. The 
individual whose income is barely able to support him and his 
family may be said literally to have no ability to pay taxes, and 
yet he has an income. If his income is slightly greater than neces- 
sary to support himself and his family, then he may be said to have 

^ Adam Smith, The Wealth of Nations, Vol. II, pp. 414, 415, 416. 



THE GOVERNMENT'S SHARE 315 

some ability to pay taxes. This obviously calls for a certain 
degree of progression in the way of taxation. 

Repressive taxation. The tendency is more and more for ex- 
pert opinion to favor some sort of progressive, or graduated, taxa- 
tion as more just than proportional taxation. Just how far in 
this direction we should go is not easy to determine. It is 
never wise to kill the goose that lays the golden eggs. Neither 
is it ever wise to tax anyone so heavily as to drive him out of 
productive business. If taxes are ever made so heavy upon 
people who are carrying any large undertaking as to discourage 
accumulation, enterprise, and thrift, the state will be doing 
itself an injury. Professor E. A. Ross^ has suggested a new 
canon of taxation to add to the four which Adam Smith gave us : 
A tax should be as little repressive as possible. 

The sum and substance of all sound taxation is that the taxes 
should be as little burdensome as possible. The burden of a tax 
is twofold. There is, in the first place, the disadvantage to the 
payer of the tax. It is a loss to him to have to give up his revenue. 
In the second place, there is the discouragement to enterprise 
which a heavy tax involves. This is particularly disastrous when 
the government is irregular and whimsical in its taxing moods. 
When producers never know what to expect from the government 
and its tax collectors, they have little inducement to enterprise. 
Under such conditions there will be little wealth produced for the 
government to tax, and things are likely to go on from bad to 
worse. 

In case there are undesirable businesses which the government 
does not care to prohibit, or undesirable habits which the govern- 
ment does not care to suppress, the repressive power of taxation 
may be used. Men may then be made to pay for their folly, or 
to give up their folly tO; avoid taxation. In extreme cases com- 
plete suppression is doubtless better than mild repression; in 
milder cases, such as luxurious consumption, ostentatious dressing, 
etc., the mildly repressive effect of a tax is desirable. 

^ "A New Canon of Taxation" (abstract). Publications of the American 
Economics Association (1893), Vol. VIII, pp. 49-50. 



31 6 ELEMENTARY ECONOMICS 

EXERCISES 

1. What is meant b}^ the government's share? 

2. What are the different kinds of public revenue? 
„ 3. What is a tax? 

,. 4. What is the difference between direct and indirect taxes? 

5. Is monopoly price the same as a tax? - -^ 

6. What are the marks of a good revenue system ? 

7 . What is meant by double taxation ? 

8. What is meant by the overlapping of taxation systems ? 

9. What is an inheritance tax? 

10. Ought an inheritance tax to be changed frequently ? Why not ? 

11. What is meant by the general-property tax ? 

12. What is meant by progressive taxation? 

: 13. What are Adam Smith's canons of taxation? 
14. What is meant by repressive taxation ? 



PART SIX. THE CONSUMPTION 
OF WEALTH 



CHAPTER XXXVIII 
MEANING AND IMPORTANCE OF CONSUMPTION 

Two meanings of the word "consumption." There have been 
two meanings given by economists to the term "consumption of 
wealth." By one group it has been made to include any use of 
wealth in which it is worn out, used up, or destroyed in the proc- 
ess ; by another group it is defined as meaning only such use as 
gives direct satisfaction to a consumer. Under the first definition 
coal is consumed when it is burned to make steam for the running 
of machinery as well as when it is burned to supply warmth for 
the comfort of the human body. Under the second definition only 
the latter use of coal would be called consumption. 

It is always explained, however, that the term "unproductive 
consumption" does not mean useless or unnecessary consumption. 
It means that wealth thus consumed, in contradistinction to that 
which is productively consumed, is not used up in the process of 
producing other wealth. It is used rather for the final purpose for 
which all wealth is commonly supposed to be produced ; namely, 
the direct satisfaction of human desires or needs. 

The tendency among recent writers is to use the term "con- 
sumption" in the narrower sense. By the consumption of wealth 
under this definition is meant the culmination of the whole 
economic process, namely, the satisfaction of human desires. 

The purpose of the user is the determining factor. Under 
modern conditions goods are used either for direct satisfaction 
or for the getting of an income. If they are being used for the 
getting of an income, they are not being consumed in the economic 
sense. The physician's automobile which is used in his profession 
is being worn out, but it is not being consumed in the economic 
sense. When the same automobile is used for his own enjoyment 
or that of his family, it is being consumed. 

319 



320 ELEMENTARY ECONOMICS 

Importance of consumption. Most textbook writers on eco- 
nomics have regarded the consumption of wealth as a department 
of the subject coordinate with such departments as production, 
exchange, and distribution. None of them, however, has given as 
much space to it as to those other departments. The reason has 
apparently been the general opinion that consumption is essentially 
an individual matter, with which the public has had little or no 
concern. Laws relating to consumption have been called sumptu- 
ary laws and have generally been condemned or only half-heartedly 
approved. There is a growing opinion, however, that consumption 
is quite as important, from its effect on national prosperity, power, 
and greatness, as any department of economics. Even the regu- 
lation of consumption, as in the case of laws regulating or pro- 
hibiting the use of alcoholic beverages, is becoming popular. 

The importance of the consumption of wealth is further em- 
phasized by the consideration that as many and as dire calamities 
have overtaken nations and peoples because of their irrational 
habits of consumption as because of inefficient systems of produc- 
tion, exchange, or distribution. In fact, consumption reacts power- 
fully upon all the other departments, particularly upon distribution. 
The standard of living of the laboring classes, which is a part of 
consumption, has much the same influence upon the price of their 
labor as that exercised by the cost of production upon the price 
of a material commodity. Again, the rate of the accumulation of 
capital, upon which so many things depend, is largely determined 
by the habits of consumption. The effect of luxury upon industry 
and general national strength is one of the largest of all questions. 
These illustrations are enough to show that the subject of con- 
sumption deserves the most careful study and the most serious 
treatment which economists can give it. 

Ratio of consumption to production. In a profound and il- 
luminating article on War and Economics,^ Dr. E. V. Robinson 
calls attention to the fact that in any country, when its produc- 
tion exceeds its consumption, the result is economic progress; 
but when consumption exceeds production the result is economic 

^ Political Science Quarterly, Vol. XV (December, 1900), p. 581. 



MEANING AND IMPORTANCE OF CONSUMPTION 321 

retrogression. When production exceeds consumption, wealth is 
accumulating and taking on durable forms ; when consumption ex- 
ceeds production, the national wealth shrinks and the nation lives 
on its accumulated capital and, moreover, allows its accumulated 
fund of durable wealth to deteriorate. 

When production exceeds consumption, moreover, not only are 
durable forms of wealth conserved and kept in repair ; they are 
continually improved and new forms produced. There is energy 
to spare from the work of producing ephemeral articles for im- 
mediate consumption. Here time is devoted to permanent works 
and new forms of construction. Durable goods multiply in quan- 
tity, capital accumulates, more and better tools and equipment are 
provided, and productive power accumulates by a kind of geo- 
metrical progression. 

Whether, in the nation at large, production exceeds consumption 
or not depends on the general habits of the average person. If the 
average person demands large quantities of those things which 
supply physical and temporary satisfaction, such as luxurious food 
and drink, fashionable clothing, and expensive amusements, there 
will be a tendency for consumption to exceed production. If, 
however, the average citizen is satisfied with the kind of food 
which nourishes, with clothing which affords comfort and con- 
venience, with amusements which are inexpensive and which tend 
to preserve the health, strength, and agility of both mind and 
body, there will be a tendency for wealth to accumulate. 

Other factors are, however, involved. There might be a popu- 
lation with simple habits such as we have indicated, but with no 
desire for the durable satisfactions of life and with little energy 
to be devoted to production. Such a population would necessarily 
remain in a low state of civilization. It would not provide abun- 
dantly either for the temporary or for the permanent means of 
satisfaction, but would remain in sloth and squalor. But if, in 
addition to the simple habits of consumption so far as food, cloth- 
ing, and amusements were concerned, the average person possessed 
an intense desire for durable goods, — for beautiful buildings, 
libraries, schools, and other civilizing agencies, — the conditions 



32 2 ELEMENTARY ECONOMICS 

would be favorable to the accumulation of wealth and to all forms 
of economic progress. If, in addition to all these, the average per- 
son were energetic and not disinclined toward work, — if he were 
willing to study hard and work hard, and if his motives were such 
as to drive his mind and body at high speed, — the conditions 
would be still more favorable. This combination of favorable con- 
ditions would make progress almost inevitable. Nothing except 
a geological cataclysm or a world war would prevent such a 
people from advancing in, the arts of civilization. 

Preference for durable goods. It is to be borne in mind that 
the motives and desires of people are fundamental to this problem. 
Any people can have as much progress arid as high a state of 
civilization as they desire, provided they desire them strongly 
enough and are willing to pay the price. If the people of ancient 
Athens had preferred to spend their time, their energy, and their 
money on temporary satisfactions rather than on the architectural 
adornment of their city, they could have done so. But because 
they chose rather to spend their money and their energy on durable 
goods, they left the world richer than they would have done if 
they had made the ignoble choice. 

The same comment may be made upon the people of various 
medieval cities, who cared so much for their religion that they 
were willing to spend their money, time, and energy in building 
cathedrals as monuments to their religious faith. Similarly, any 
city of today can be as fine and beautiful as it wants to be, pro- 
vided it is willing to pay the price. If it chooses to follow the 
example of those cities of the past that became great and left 
something to show that they once existed, — something to justify 
that existence, — it will merely be choosing to consume from day 
to day and from generation to generation less than it produces, in 
order that a part of the productive energy of each generation may 
build for the future. That spells progress. If the city chooses 
otherwise, it will never leave anything to show to future genera- 
tions that it once existed, much less to justify that existence. 

Value of a man. From the standpoint of progress the value 
of the individual depends on the excess of his production over his 



MEANING AND IMPORTANCE OF CONSUMPTION 323 

consumption. The following formula will determine with mathe- 
matical accuracy how much a person is worth from the standpoint 
of national prosperity: 

F = P- C 

In this formula V stands for value — that is, the value of the 
man ; P stands for his production ; C, for his consumption. Thus 
the formula reads, The value of the man equals his production 
minus his consumption. In the cases where his consumption ex- 
ceeds his production his value is negative ; he is a drag on progress, 
and the world will at least save his victuals when he leaves it. 

The whole life is the unit. Lest this be too hastily interpreted, 
it should be pointed out that a human life as a whole, and not a 
fragment o^ it, should be regarded as a unit. The consumption of 
a child exceeds his production, but this does not condemn him. 
So, likewise, during the declining years of those who reach a good 
old age, consumption may exceed production, but this does not 
condemn the life. If the life as a whole produces more than it 
consumes, it leaves the world richer by that difference. 

Again, production should be given a very wide interpretation. 
One may produce without handling material goods of any kind, 
.but by inspiring the productive virtues in others, by teaching pro- 
ductive skill to other people, by scientific investigation, by trans- 
mitting knowledge, and in various other ways. If, after making 
all allowance for these different forms of productivity, the mature 
individual in sound health finds that he is producing less than 
he is consuming, it is time for him to begin to consider his ways 
and to experience a change of heart. He needs to be converted 
from a waster into a producer. 

Boarders at the national table. Dairymen sometimes use the 
term "boarder" to describe a cow whose feed and care cost more 
than her milk is worth. Every wise dairyman tries to get rid of 
his boarders and keep only those cows whose production exceeds 
their consumption. It would seem that men ought to be held to 
at least as high a standard as that to which cows are held. A man 
who falls below that standard is a drain upon his country. 



324 ELEMENTARY ECONOMICS 

The class of boarders includes not simply the tramps and beg- 
gars but everyone else who is not usefully engaged, even though 
he or she lives upon his wife's or her husband's fortune or upoii 
inherited wealth. The class includes even others. Even those who 
are somewhat usefully engaged may be consuming such expensive 
products and may require so many servants to wait upon them as 
to use up more man power than they replace by their own work. 
As a mere exercise of patriotism, therefore, every mature person 
should ask himself seriously whether the country is the gainer or 
the loser by reason of his existence, whether the man power re- 
quired to produce for him and take care of him is greater than the 
man power which he contributes to the nation's fund. 

The conservation of man power. The importance of this 
consideration is peculiarly clear in time of war and in other great 
emergencies. The necessity of conserving every ounce of man 
power is then manifest. We then see clearly that anyone who is 
not usefully engaged is a menace rather than a help in the struggle. 
The food alone which such a person consumes is acutely needed, 
to say nothing of the man power which he requires in other ways. 

Even those who are usefully engaged ought to feel that luxu- 
rious consumption at such a time is an interference with the 
welfare of their country. To consume unnecessary luxuries is to 
require an unnecessary quantity of man power to produce for us. 
The same need exists in time of peace, though it is not so acute 
and is not fraught with such tragic results. 

EXERCISES 

1. What are the two meanings that have been given to the word 
''consumption" in economics? 

2. What happens to national prosperity when consumption exceeds 
production? 

3. How does a preference for transient rather than for durable 
goods affect the national prosperity ? .- 

4. From the standpoint of national prosperity how should you 
determine the value of a man? 

5. How much is a man worth who consumes more than he produces ? 



CHAPTER XXXIX 
RATIONAL CONSUMPTION 

Differences between a high and a rational standard of living. 

Economists have generally classified standards of living on the 
basis of their cost or expense. A high standard of living has meant 
merely an expensive standard ; a low standard simply a cheap 
standard. Very little attention has been given to the difference 
between a rational and an irrational standard. By a rational 
standard of living is meant one which increases, the margin between 
one's production and one's consumption. In the formula V=P — C, 
as given in the preceding chapter, the most valuable man is one in 
whom P exceeds C by, the greatest margin. The purpose of the 
present chapter is to contend that the most rational standard of 
living is one which produces the most valuable man. 

This margin of difference between P and C would be increased, 
of course, either by decreasing C, by increasing P, or by doing both 
at the same time ; that is, if without reducing in any degree a 
man's efficiency as a producer, he were to reduce his cost of living, 
he would thereby be adding to his value from the economic stand- 
point. To that extent he would enable the community to produce 
more than it consumed. He would thus be a factor in the accumu- 
lation of productive power, or of the durable products of civiliza- 
tion. If, however, by reducing his cost of living, he at the same 
time reduced his productive efficiency in the same proportion, 
there would, of course, be no gain, and there might be some loss 
involved. If, on the other hand, by spending more on himself, 
especially on books and other means of education, on tools, or on 
more nourishing food, he were able to increase his productive effi- 
ciency, his increase in consumption would more than justify itself. 

From this point of view the problem for every individual is to 
adopt that standard of consumption which will leaves the largest 

325 



326 ELEMENTARY ECONOMICS 

margin between production and consumption. From the same 
point of view it would frequently be necessary that one man should 
spend more on himself than another would be justified in doing. 
Take, for example, a great surgeon whose time is exceedingly 
valuable, riot only to himself but to the community he serves. He 
might very properly keep an automobile, a chauffeur, and other 
timesaving devices and agencies. He might even keep a valet to 
look after his clothes. If these forms of expenditure would enable 
him to give more people the benefit oi his skill, it would be to 
their advantage for him to spend money in these ways. But an 
inexperienced surgeon, whose time is not valuable to the com- 
munity, — who, in fact, has time to spare, — could not properly 
indulge in the same timesaving devices. For any person whose 
time is not very valuable to the nation to employ a valet or even 
a chauffeur would be ridiculous waste and ostentation. 

Buying trinkets is not good for business. In opposition to 
this point of view there is a popular theory to the effect that lavish 
expenditure is somehow good for business. The difficulty with this 
argument is that it always assumes that if the individual is not 
consuming lavishly, he must necessarily be hoarding his money. 

It is surely as good for business and labor that one should 
spend money on builders and architects as on milliners and con- 
fectioners. He who consumes lavishly spends his money on confec- 
tioners, milliners, and other producers of immediate and temporary 
satisfactions. He who consumes rationally spends as much money 
as he who consumes lavishly, but spends it on things which build 
and improve, rather than on things which merely afford temporary 
gratification. A community of lavish consumers would, of course, 
give actual employment to those whose work is to amuse and 
gratify, but little employment to builders and others producing for 
future generations. The community that spends money in build- 
ing for future generations will improve from generation to gener- 
ation ; each generation will inherit from the preceding one a larger 
fund of durable wealth and will add to this and bequeath a still 
larger fund to successive generations. It will not be many gener- 
ations before the latter community will outstrip the former, and 



RATIONAL CONSUMPTION 327 

the people from the former will be emigrating to find employ- 
ment and other advantages in the latter. 

The miser and the spendthrift. Instead of placing the miser 
and the spendthrift in opposite categories, we should really put 
them together. The miser is a lavish consumer in a most impor- 
tant sense. With extreme gratification he counts his hoard. He 
loves to handle it, to see it glitter, and to hear it jingle. He is in 
the strictest sense a consumer of gold. If our traditional miser, 
instead of hoarding his gold in his cellar, were to use it in gilding 
his house, no one would doubt that he was a spendthrift. The 
same amount of gold is withdrawn from circulation, and much 
the same effect on the market is produced in either case. 

Both the miser and the spendthrift should be contrasted with 
the rational buyer, or the investor in durable goods. The true 
investor buys goods of which he himself will probably never be 
able to absorb the full utility. He buys goods that will last so long 
that future generations will get a part of their utility. Those fu- 
ture generations will therefore have a better start than he did. If 
this is kept up indefinitely, generation after generation, by all 
members of the community, it will be a very prosperous and pro- 
gressive community ; but if each individual of each generation 
merely says, "What has posterity ever done for me that I should 
be called upon to do anything for posterity? Let us eat, drink, 
and be merry ! " that will always be a backward community. 

The case of rival commumties. It was suggested above that 
if two communities started side by side with equal natural advan- 
tages but with different habits of spending, we might get a test 
of the comparative merits of those habits. This may be used 
likewise as a means of testing, in imagination at any rate, the ra- 
tional quality of a standard of living. That standard of living 
which would enable a community or nation to make the most 
rapid and permanent progress would have to be commended. 
Something depends, however, on our definition of progress. There 
may be about as many ideals of progress as there are people who 
have ideals. Without attempting a full and complete definition, it 
would seem fairly safe to suggest that among other things progress 



32 8 ELEMENTARY ECONOMICS 

should include general improvement in comfort, well-being, and 
satisfaction. 

What standard of living, if adopted and followed persistently, 
generation after generation, would increase the comfort and well- 
being of the community and develop the power to support in- 
creasing numbers of people and support them better, add to 
the productive power of each generation, and ultimately raise 
the economic, social, political, and even military strength of the 
nation to the maximum? Granting that there are other factors 
in the problem, we still have the right to insist that the standard 
of living is one important factor. The standard of living which 
contributes most to progress as we have defined it is therefore to 
be commended. That standard of living will contribute most in 
which the net contribution of the average person is the highest ; 
that is, where his production exceeds his consumption by the 
widest margin. 

It must begin to appear that rational consumption is as impor- 
tant a factor in national prosperity as efficient production. In a 
most important sense useless consumption is a waste of labor, 
or of productive power, since it requires labor, or productive 
power, to produce the useless things which we consume. The 
labor which produces these useless things is wasted as truly as 
though it were idle, badly directed, or working with crude and 
unsuitable tools. 

Liberal ideas as to what is necessary. It is well, however, to 
be rather liberal in our ideas as to what is necessary in order to 
maintain a man's working capacity at its maximum. Consi^ier^ble 
recreation and relaxation are always recognized as necessary. The 
anticipated enjoyment, not only of games and other forms of 
recreation but of objects of comfort and delight, is a spur to 
energy. It is not only a spur to energy; it is also a means of 
creating and preserving a joyful frame of mind, without which 
sustained effort is impossible, and without which it is frequently 
asserted that no really fine work of any kind is ever done. 

Joy in work. Looking forward to a holiday or a vacation has 
sustained many a worker through weeks and months of study and 



RATIONAL CONSUMPTION 329 

toil. The desire to possess a bicycle or an automobile has gal- 
vanized many an otherwise indolent boy into an active worker. 
The pleasure of giving toys to their children at Christmas time 
has lightened the toil of many a father and mother through many 
a hard winter. 

Tools as consumers' goods. The world has undoubtedly lost 
much, in productive efficiency as well as in the joy of living, 
through its failure to appreciate the possibility of turning tools 
and other producers' goods into consumers' goods. That one must 
have good tools in order to do good work has long been recognized, 
but we have scarcely begun to realize the full meaning of the term 
"good tools." It is not only necessary that they be capable of 
doing their purely mechanical work ; it is also essential that they 
please the mind of the worker. They must be pleasing to look 
upon as well as agreeable to the hand. 

The purpose of a tool is to bridge the gap between the worker 
and the object upon which he is working, — to enable him to trans- 
fer to the object the idea which he has in mind. It must therefore 
fit the mind of the worker as well as his hand and his arm. 

The importance of having tools which help to keep the worker in 
an agreeable frame of mind is not so much in the fact that he can 
do more or better work in a given minute or a given hour, though 
there is something in that. The chief importance lies in the fact 
that he can keep at it for more minutes, more hours, more days, 
and more years. Some rare geniuses are able to work regularly 
and all the time, "taking infinite pains" and apparently never 
tiring. 1 Most of us, however, are desultory creatures who have 
to coax ourselves to work steadily. | It is easier to coax ourselves 
to work properly if our tools are such as we delight to handle and 
our workshop is a place where we delight to be. 

Pride in work. The spirit which regards work as a more or 
less repulsive necessity — which tries to cover up in many ways 
the evidences of work — is probably responsible for a large part 
of the neglect which we have shown to our working places. 
Naturally enough a person who regards work merely as a disagree- 
able necessity — something to be ashamed of and avoided on every 



330 ELEMENTARY ECONOMICS 

possible pretext— is not likely to spend very much money on the 
adornment of his tools or the beautification of his working place. 

No rural neighborhood, for example, is quite so desolate as that 
from which people retire as soon as they have accumulated enough 
to enable them to live in town. Farmers who retire as soon as they 
can possibly afford to do so are not likely to spend much money 
in adorning their farmhouses or in making the neighborhood 
attractive. It is only where you find farmers who are glad that 
they are farmers— who expect to remain farmers and whose 
children look forward to the same career — that you find the 
farms, the homes, and the community adorned and beautified. 

If it were not for the fact, referred to above, that town people 
have inherited certain aristocratic traditions (or else that they try 
to ape those who have) and are rather anxious to get away from 
the sources of their incomes, they might find it possible, in some 
cases at least, to live near their places of business. If they all did 
so they would spend their money there and would also, if they 
could afford it, beautify those surroundings as they now beautify 
the suburban districts where they live. 

It is astonishing how much of the fashion of the world is due 
to the desire to avoid the appearance of having to work, or even to 
advertise the fact that one does not have to work. In old times 
certain Chinese magnates used to allow the finger nails to grow 
to extraordinary lengths as a visible sign that they did not have 
to work. The binding of the feet of the girls is said to have had 
the same origin. The train of her gown, which only lately was 
a fashionable necessity for every lady in Christendom, answered 
much the same purpose. 

The opposite tendency shows itself once in a while, however. 
A good farmer usually likes to work with a handsome team, well 
groomed and harnessed. The team is to him both a consumers' 
good and a producers' good. There is not much doubt that such 
a fanner works more cheerfully and more steadily and that he 
finds life more enjoyable than he would if he tried to get along 
with an ill-matched, poorly harnessed team in which he could take 
neither pride nor satisfaction. 



RATIONAL CONSUMPTION 331 

It is reasonable to suppose that we should all do better and more 
persistent work and get more enjoyment out of life if we took 
some pains to make the conditions of our work attractive. If this 
is so, it is a matter of great economic importance. More attention 
to this subject will contribute to the prosperity, strength, and 
greatness of the nation, and even more to the enjoyment of the 
people. Expenditure for the embellishment of our tools and the 
adornment of our working places would form a part of a rational 
system of consumption. 

EXERCISES 

1. What is meant by a high standard of living? 

2. Is it the same as a rational standard? 

3. Is it good for business to spend money extravagantly or to buy 
things of' trivial importance? 

4. Is there any essential difference between the miser and the 
spendthrift? If so, what? 

5. Does a thrifty community in the long run spend more or less 
than a thriftless community? 

6. What is a necessary of life? 

7. It is possible to think of the tools of production as consumers' 
goods? In what sense could they be so considered? 

8. Is it possible to think of work itself as a form of consumption? 
Is play a form of consumption or a form of production ? 



CHAPTER XL 
LUXURY 

Different classes of consumers' goods. Consumers' goods have 
been divided into four classes, according to the kind of desires 
which they are designed to satisfy. They are necessaries, com- 
forts, decencies, and luxuries. This, however, is at best only a 
rough classification. It may seem fairly easy to distinguish be- 
tween necessaries and comforts, and there are doubtless many cases 
where goods are easily classified ; but there are also many cases 
where it is difficult to determine whether the good in question is a 
necessary, a comfort, or even a decency. Another difficulty which 
tends to obscure the distinction is found in the fact that no one, 
however poor, confines himself to necessaries. Part of his ex- 
penditure will go for comforts, part for decencies, and part even 
for luxuries. Again, no one, however rich, can avoid the buying 
of necessaries and comforts. 

Necessaries. In a general way we may define necessaries as 
all goods which are required for the maintenance of physical health 
and strength, not only of the mature man but also of his family. 

Comforts. Of all classes of goods, comforts are the most diffi- 
cult to define. They include everything which, though not 
absolutely necessary for health and strength, can yet hardly be 
dispensed with in any society where life is really worth living. A 
young and vigorous person might, by running to and from his work 
in cold weather, dispense with an overcoat. From his point of view 
an overcoat could hardly be called a necessary, and yet it would be 
a great comfort. Cushions or upholstered furniture, spring mat- 
tresses, etc. can hardly be called absolute necessaries, and yet they 
would be considered almost indispensable by the average family. 

Decencies. The dividing line between comforts and decencies 
is likewise obscure. By decencies we mean those articles of 

332 



LUXURY 333 

consumption which the habits or customs of one's neighborhood 
or one's class prescribe, and without which the individual or the 
family would feel that it could scarcely maintain its position of 
respectability. Anything which an individual member of any class, 
occupation, or profession would feel ashamed to be without would 
come under our definition. 

Luxuries. Luxuries are articles of consumption which are not 
required for the physical health and strength of the people for 
their physical comfort, or by the rules of society, but are wholly 
matters of individual indulgence. The dividing line, however, 
between decencies and luxuries is still very obscure. If a person 
belongs to a small group of spendthrifts, it may be claimed that 
the rules of his social group compel him to spend money lavishly 
on things which others would regard as pure luxuries. He may 
therefore claim that these are only decencies, because they are 
prescribed by the rules of his group or class. 

Instead of accepting the verdict of any special class or set, it 
would seem better to confine our idea of decencies to those things 
which are prescribed by the almost universal consensus of opinion 
of the time and place. Thus, in America, for example, it would 
almost universally be thought indecent for men and women to 
appear in public places, even in warm weather, without shoes, 
though there are certain isolated communities where this rule 
would not prevail. Before the advent of the waist shirt it was 
generally regarded as improper for a man to appear at any public 
place, especially indoors, without a coat. That every woman shall 
possess certain articles of finery is a rule even among the poorest 
of people. It will be better, therefore, if we restrict the definition 
of decencies to those things which society in general prescribes. 
Things demanded by the fashions of some special clique or coterie 
would have to be called luxuries. 

Stimulating effect of luxury. Economists have been some- 
what divided on the question as to whether a luxury is always to 
be condemned or not. McCulloch^ states that any gratification, 
however trivial, is necessary if an individual is stimulated to 
1 J. R. McCulloch, The Principles of Political Economy. Edinburgh, 1825. 



334 ELEMENTARY ECONOMICS 

work in order to attain it. John Stuart Mill^ says, "To civilize 
a savage, he must be inspired with new wants and desires, even if 
not of a very elevated kind, provided that their gratification can 
be a motive to steady and regular bodily and mental exertion." 

It is a well-known fact that in certain low states of civilization 
the laborer or the peon is content with so few articles of consump- 
tion that he will not work efficiently or steadily. If by working 
three days in a week he can earn wages enough to support him, 
in the style to which he is accustomed, for seven days, he will work 
only three days in the week. It has been generally recognized 
that the only cure for this difficulty is to raise his standard of 
living and increase his wants, so that he will have a motive for 
regular and steady work. Many interesting stories are told of the 
devices by means of which the laborer is induced to work or by 
which his wife is induced to demand more wages of him in order 
that she may provide herself with finery. 

We need not go to backward countries, however, to find examples 
which illustrate precisely the same principle. There are men 
among us who reduce the number of working hours per day or 
week for much the same reason. Finding that they can earn 
enough in four hours to support them for twenty-four, they choose 
to work only four hours a day ; that is, they go to their offices at 
about ten o'clock in the morning and stay until about two, and 
spend the rest of the day at the club or the golf course. There are 
still others who find that they can earn enough in twenty years 
to support them for the whole of their lives. They therefore retire 
from business long befora their physical and mental capacity has 
begun to decline, and spend the rest of their time in pleasant 
pursuits. 

Economically speaking, however, all these men, from the peon 
up, are merely choosiug between different kinds of luxury. To the 
peon, leisure, sport, amusement, and even rest are luxuries in which 
he delights. If his desire for this sort of luxury is stronger than 
his desire for other kinds, he will choose this kind. The same is 
true of the man who cuts down his working day, his working week, 

1 Principles of Political Economy, Bk. I, chap, vii, § 3. 



LUXURY 335 

or his working years. To him leisure, sport, and rest are luxuries. 
If he cares more for these than for such additional luxuries of 
other kinds as he could secure by working longer, he will, of course, 
choose these. 

Material and immaterial luxuries. It is true that by choosing 
material luxuries, rather than the immaterial satisfaction of leisure 
and rest, the quantity of material goods which are produced and 
put on the market is increased. The statistics of wealth are ex- 
panded. The census taker and the tax assessor find more tangible 
articles of wealth in such a community than they would find in the 
community which preferred to take its luxury in the form of 
leisure. It happens that we are members of a strenuous race, to 
whom leisure does not seem very desirable, of a race which might 
be malignly characterized as a greedy or a gluttonous race, having 
powerful desires for material luxuries. It is natural for us to 
think that we have made much the better choice when we take 
our luxury in the form of material goods rather than in the form 
of rest. We are, therefore, much inclined to despise the race 
which chooses idleness. There is such a thing as a pot calling a 
kettle black. 

A storehouse of labor. There is an argument, however, which 
goes back at least as far as David Hume, to the effect that luxuries 
must be regarded as a storehouse of labor which in the exigencies 
of the state may be turned to the public service. This may mean 
merely that a community which is expending a large proportion 
of its energy in the production of luxuries may, in times of great 
crisis, turn that surplus energy into the work of meeting the crisis. 
In time of war, for instance, the consumption of luxuries may be 
cut down, and the productive energy, which had been used in the 
production of luxuries, may then be used in the prosecution of 
the war or in the manufacture of munitions and war equipment. 
This is undoubtedly a sound argument so far as it goes. 

In order to put several million men of working age into the 
army and navy, and more millions into the munition factories and 
navy yards, and others into the mines to produce the raw mate- 
rials, and still others onto the farms in order to increase the food 



33^ ELEMENTAR,Y ECONOMICS 

production, it is absolutely certain that labor must be withdrawn 
from some source. It is fairly obvious that there are only two 
sources from which it can be drawn. They who are not working 
may be put to work, and those who are doing unnecessary kinds of 
work may be put into the necessary industries. 

Reducing consumption in times of national crisis. If every 
luxury-producing industry were closed down, a vast quantity 
of labor would be released. It would then be available either for 
military purposes or for the production of the necessaries of life. 
Our golf courses, baseball fields, and tennis courts could be trans- 
formed into farms and gardens. This would add a good many 
acres to the productive land, and, what is vastly more important, 
the players as well as the spectators could be used in productive 
work, greatly to the advantage of the nation. 

These changes in habits may profitably go much farther. The 
people may economize greatly in their consumption. Starch, in 
the form of grain, potatoes, or coarse vegetables, is our principal 
food. To this must be added a very moderate amount of protein, 
fats, and sugar. These, however, may also be made to serve the 
purpose of making the basic starchy food more palatable. Fruits 
and the finer vegetables and salads should be made to serve mainly 
as relishes. Instead, many of us make our meals principally of 
things which should serve as condiments, relishes, and delicacies, 
using starchy food only as a means of diluting them. 

Rapid recovery after a local disaster. Even in cases of great 
local disaster, such as a great fire or earthquake, it has been re- 
marked many times that recovery comes with amazing rapidity. 
In spite of the fact that vast quantities of wealth are destroyed, 
the city soon recovers and becomes apparently as prosperous as 
ever. Luxury is supposed by some to have an important bearing 
on this question. The energy which, before the disaster, was 
spent in producing luxuries is now available to be spent in rebuild- 
ing what was destroyed. In order to do this, however, the people 
must, for a time at any rate, reduce their consumption of luxuries. 
The individual whose property has been destroyed is to that ex- 
tent poorer than he was before. He may borrow capital with 



LUXURY 337 

which to rebuild, but until the debt is paid off, his effective in- 
come is considerably reduced. He therefore has less money to 
spend on articles of luxury ; he is virtually spending that money 
on a new building. 

The objection may be raised that the luxury which takes the 
form of leisure would also furnish a fund of energy for the meeting 
of a great national crisis or repairing a local disaster. Men who 
have remained idle, enjoying leisure, may now go to work to carry 
on the war or to rebuild the city which has been partially de- 
stroyed. This objection is somewhat weak, however, because, in 
the first place, habits of sloth and idleness are much more difficult 
to overcome than habits of lavish consumption. The sheer inertia 
of the people makes it almost impossible to rouse them to extra 
exertions in time of crisis, whereas the people who have been exert- 
ing themselves strenuously in the production of articles of luxury 
may, with less difficulty, redirect their strenuous energy. In a 
sense the productive machinery of the community is already going. 
It can be kept going and its direction changed more easily than it 
can be started up. 

In the second place, if a community takes its luxury in the form 
of idleness, it is certain to be ill equipped with the machinery of 
production as w6ll as with the technical knowledge and skill which 
are necessary to efficient production. If it lacks machinery and 
technical knowledge and skill, it will not 'be able to carry on a 
modern war successfully or to repair a local disaster ; whereas 
a community that takes its luxury in the form of material goods 
will have learned, in the process of production, much technical skill 
and will have accumulated vast funds of machinery and tools. If 
there is anything that modern warfare has taught, it is the su- 
periority in war of the nation that is thus equipped. The technical 
skill and the machinery which are accumulated for purposes of 
production may easily be turned to the purposes of destruction, 
and in war the community that is best equipped for the work of 
destruction will win. 

Reducing the rate of permanent construction. So far the 
argument seems conclusive in favor of material luxury as against 



338 ELEMENTARY ECONOMICS 

immaterial luxury in the form of leisure and idleness. We are far, 
however, from a complete justification of luxury in the ordinary 
sense. The community that is in the habit of investing its money 
for the future rather than of buying objects of immediate grati- 
fication will likewise have a fund of surplus energy at its disposal. 
All the energy which has been devoted to permanent construction 
for the future good of society may, in time of great national crisis 
or local disaster, be redirected toward meeting the crisis or re- 
pairing the local damage. The kind of skill which is necessary to 
permanent construction is of qiiite as high an order as the kind 
which is necessary to the production of luxurious articles of con- 
sumption. All the advantages, in short, which a luxurious com- 
munity possesses for the meeting of a great crisis are also possessed 
by the thrifty community which spends a good portion of its in- 
come in durable construction and in building for future generations. 

In the long run the community that spends a large portion of its 
energy in permanent construction will have certain advantages 
over the community that consumes luxuriously. If every farmer, 
for example, should put back into his farm a part of his annual 
income, in the way of improvement of the soil, in ditching, drain- 
ing, fencing, and building, he would be using up surplus energy 
just as truly as he would be if he spent that amount of money in 
luxurious consumption. In time of national crisis he can suspend, 
for the time, further building and improvements on his farm and 
have energy to spare for the production of more food ; or he can 
dispense with a certain amount of hired help, which will then be 
available for government purposes. After a few generations the 
nation whose farmers systematically put back into their farms a 
part of their incomes will have much better farms and much 
greater productive power than the community which merely keeps 
its agricultural wealth intact and spends the surplus in luxurious 
consumption. 

That which applies to farms applies also to factories, shops, and 
all other productive establishments. The community which is in 
the habit of adding to its accumulated wealth in each generation 
by investing a part of its income in tools and instruments for 



LUXURY 339 

future production will, after the lapse of a few generations, be 
vastly stronger than the community which merely keeps its pro- 
ductive power intact and consumes all its income. 

The luxurious consumption of material articles is doubtless very 
much better than the luxurious enjoyment of leisure — that is, it 
is better to exercise our energy and ingenuity in producing luxuries 
than to be lazy and idle; but it is still better to exercise that 
energy and ingenuity in building for future generations, in adding 
every year to the productive power of the nation or to the re- 
sources of civilization. To do these things it will be necessary to 
add the virtues of thrift and forethought to those of industry and 
ingenuity. Through the combination of all these virtues we shall 
do better than through a part of them. He who does less well 
than he can, does ill. He who consumes useless luxuries when he 
might invest productively is doing less well than he can. 

EXERCISES 

1. How should you define luxuries ? 

2. How should you define necessaries ? 

3. How should you define comforts ? 

4. How should you define decencies ? 

5. What is the distinction between material and immaterial luxuries ? 

6. In what sense is luxury a storehouse of labor? 

7. Why do modern communities recuperate so rapidly after wars 
and other disasters? 

8. Which is better for a nation, to take its luxuries in the form of 
material goods or in the form of idleness or leisure? 

9. Which is a better way of using up surplus energy, in luxury or 
In durable construction? 



CHAPTER XLI 
THE CONTROL OF CONSUMPTION 

Difficulty of suppressing luxury. We saw in the last chapter 
that luxurious consumption is less desirable from the national 
standpoint than thrift, forethought, and the investment of surplus 
income in the enlargement of industries and in buying objects of 
durable satisfaction. The difficult question is to know what to do 
about it. It is easy to demand that the government should re- 
press luxury, but it is not so easy for the government to do it. One 
of the first difficulties is that of defining luxurious objects. There 
are not many objects whose uses are wholly luxurious. Coal in 
certain quantities is a necessity, but it may be consumed in 
luxurious quantities. The same may be said of most kinds of 
food and clothing. Again, that which is a luxury to one may be 
a necessity to another. 

Another difficulty is found in the probability that the repression 
of luxurious consumption might lead to sloth and inaction. To 
prohibit the consumption of articles of luxury might very easily 
take away the motive to industry. If the people cannot have ex- 
pensive commodities, they may take their luxury in the form of 
leisure, idleness, and self-amusement. This, as we saw in the last 
chapter, is even less desirable than luxurious consumption. An 
increase of wants sometimes has the effect of overcoming the tend^ 
ency to sloth and idleness. If the government should make it 
impossible for men to gratify these increased wants, it would 
merely drive them back into sloth and idleness. This could only 
be counteracted by other laws compelling them to work. 

Legislative control not always effective. One of the last 
things that we learn regarding legislation is that is usually takes 
a large number of new legislative acts to correct or counteract the 
unlooked-for results of any legislative act. 

340 



THE CONTROL OF CONSUMPTION 341 

Another objection to legislative attempts to suppress luxurious 
consumption is the one pointed out by Adam Smith and others, to 
the effect that when their habits of life are fixed, men and women 
will frequently give up the necessaries of life before they will give 
up luxuries. This applies especially to the attempts to make 
luxuries expensive by taxing them. When they become very ex- 
pensive, some people will insist on having them, even if it takes 
their whole income to buy them and leaves them little for the 
necessaries of life. 

Voluntary frugality. These arguments, it will be noticed, are 
based upon the inefficiency of sumptuary laws rather than upon 
any more fundamental objection to them. In general they seem to 
produce results which are worse than the thing they try to cure. 
Nothing whatever can be said, however, against a voluntary fore- 
going of luxuries and a rationalizing of standards of living on the 
part of the people themselves. It is one thing for the people to 
want the right things ; it is quite a different thing to try to force 
them to consume the right things whether they want them or not. 
It is one thing for the people voluntarily to give up luxuries ; it 
is quite a different thing to compel them by law to do so, whether 
they are willing or not. 

Control of vice is "sumptuary legislation." In some extreme 
cases, however, a luxury becomes so extremely demoralizing and 
dangerous to society as to justify government regulation or sup- 
pression. There may be undesirable results of such legislation, — 
there are pretty sure to be ; but if these undesirable results are 
less undesirable than the thing which is suppressed, there is a net 
gain. Regulation or suppression of vice of all kinds is sumptu- 
ary legislation. If the vicious habit or the vicious form of con- 
sumption is sufficiently injurious, its suppression is justifiable, 
even though some undesirable results may follow. 

There are, however, a good many sentimental objections to 
sumptuary laws which have no connection with the real objections. 
We are all consumers ; and if the government begins regulating 
consumption we are each of us likely to come in for a certain 
amount of regulation. We are rather impatient of all_kinds of 



342 ELEMENTARY ECONOMICS 

regulation when it is applied to ourselves, though we may be very 
patient of the regulation of other people, as we are patient in the 
contemplation of other people's troubles. We are not all of us 
in the banking or the railroad business, and do not feel in danger 
when the government undertakes to regulate those and other 
special lines of business. 

No essential difference between controlling business and con- 
trolling consumption. This consideration has led to quasi-serious 
attempts to draw a sharp distinction between the regulation or 
control of business and the regulation or control of consumption. 
But all such distinctions are trivial. Habits of consumption, as 
stated above, are quite as important to the welfare of the nation 
as methods of doing business. To attempt to regulate or control 
either is certain to produce undesirable results. Nevertheless, 
where the evils, either of unregulated consumption or of unregu- 
lated business, are great enough we must have regulation and take 
our chances with the evils and difficulties of regulation. 

Whenever a nation is facing a great crisis in its history, when 
its strength and endurance are being put to a severe test, when, in 
short, it is fighting for its life as a nation, the people are forced 
to think in terms of national life rather than in terms of individual 
life. At such times the people find it just as necessary that the 
government shall regulate consumption as that it shall regulate 
production. They also find that freedom of speech is not more 
sacred or inviolable than freedom of running a business. Com- 
pulsion is likely to apply in all fields of activity, not simply 
in the field of production and business management, of transpor- 
tation and food distribution, but also in the field of consumption 
and even in the field of selling talk for a profit. 

Luxurious consumption does not increase the demand for 
labor. There can be no doubt, however, that luxurious consump- 
tion is in itself an injury to the public, and particularly to the 
laboring classes, however inexpedient it might be for the govern- 
ment to use its power of compulsion to prohibit luxury. There is 
an ancient and nauseous fallacy which says that the extravagance 
of the rich gives employment to the poor. Nothing could be 



THE CONTROL OF CONSUMPTION 343 

farther from the truth. The extravagance of the rich gives much 
less employment to the poor than the accumulation and investment 
by the rich in various kinds of productive industry. The individual 
who buys extravagantly does, of course, set labor to work pro- 
ducing the objects of extravagance, but the individual who in- 
vests largely also sets labor to work producing the buildings, tools, 
etc. in which he invests. In addition to this he adds definitely to 
the productive power of the community. Furthermore, labor must 
be hired to make use of the buildings and the tools, and there is a 
larger social product out of which to pay wages. Comparatively 
speaking, therefore, the extravagance of the rich takes away from 
the employment of the poor. From that point of view extrava- 
gant consumption is a social injury. 

Leisure versus luxury. If, as suggested above, there were no 
unlooked-for results from the suppression of extravagance, the 
state would be fully justified in suppressing it ; but if the suppres- 
sion of extravagance merely produced leisure and idleness, instead 
of extravagance, more harm than good would be done. We must 
conclude, therefore, that where a form of consumption has become 
so definitely vicious and injurious to the rest of society as to pro- 
duce more harm than would probably result from compulsory sup- 
pression, then suppression must be justified. But where, even 
though it be harmful, it is not more harmful than other results 
which would probably follow from its suppression, then suppres- 
sion is not justifiable. It must be remembered, however, that laws 
suppressing vice are in a sense sumptuary laws. The only differ- 
ence between these and other sumptuary laws lies in the fact that 
the forms of consumption which they attempt to regulate or sup- 
press meet with such general disapproval as to make their suppres- 
sion popular, whereas in other cases the forms of consumption are 
not universally condemned and therefore their suppression is not 
generally approved. 

Rationing the people. That school of social philosophers who 
hold that all forms of competition are inherently evil, and that 
therefore government compulsion and general regulation should 
be made use of to stop competition, would^ if they were consistent. 



I 



344 ELEMENTARY ECONOMICS 

desire to begin with sumptuary regulations. As stated in a previous 
chapter, there are three main forms of economic competition, — 
competitive production, competitive bargaining, and competitive 
consumption,— and of these three, competitive consumption is 
infinitely worse than either of the others. By an authoritative 
standardization of wearing apparel, food, and other forms of con- 
sumption we should tend to eliminate this worst form of competi- 
tion. That would involve, of course, the organization of society 
on a semimilitary basis, though the object need not be military 
conflict. It would mean the prescribing of a satisfactory uniform 
for all members of the community and also of a uniform diet or 
ration. Houses, furniture, and other consumable goods would also 
have to be standardized and prescribed by government regulations. 

There is no doubt whatever that if the people would accept this 
kind of regimentation and work cheerfully under it, as they prob- 
ably would not, we should prevent the waste of a vast amount 
of energy and avoid many petty jealousies and heartburnings. 
Academic costume, whatever may be said against it on other 
grounds, has the advantage of saving academicians a great deal of 
perplexity over the question "Wherewithal shall we be clothed?" 
The costumes and vestments of certain religious orders answer the 
same purpose. There are also many religious sects, of which 
the Quakers of the old school were a good illustration, which 
succeeded in saving their people from that destructive form of 
competition which strives, first, to outshine one's neighbors in 
matters of dress, and, second, not to be outshone by one's 
neighbors. 

In a time of great national crisis we have many illustrations of 
what people may accomplish in the way of economy and effort by 
putting the whole nation on a fixed ration and also by prescribing 
the manner of dress of each class in the nation. If the people 
would submit cheerfully to similar regulations in time of peace, all 
the vast energy which in time of war is devoted to the work of 
destruction could then be turned to the work of production, and 
industrial progress could proceed at a stupendous rate. It is not 
impossible that at some time in the future there may be a real 



THE CONTROL OF CONSUMPTION 345 

effort on the part of certain ambitious nations to economize their 
energy in this way in order that they may increase their strength 
rapidly in preparation for Armageddon. 

EXERCISES 

1. Granting that luxurious consumption is undesirable, does it 
necessarily follow that the government should repress it ? 

2. Is there any essential difference between controlling business and 
controlling consumption ? 

3. Does luxurious consumption increase or decrease the demand for 
labor ? 

4. Would it be economical if everybody would voluntarily standard- 
ize his or her clothes? 

5. Would it necessarily be economical if the government should 
compel us all to wear standardized costumes as uniforms ? 



CHAPTER XLII 
THE BATTLE OF THE STANDARDS 

Efficient versus cheap standards of living. Where people who 
are equally industrious, intelligent, and capable are competing, 
the advantage in the long run will be on the side of the most 
thrifty. If they earn equal amounts in the present, the thrifty 
people will invest a part of their earnings so that, in the future, 
they will have larger incomes than the unthrifty. 

This has sometimes led to the erroneous conclusion that a cheap 
standard of living would always drive out an expensive standard, 
merely because the cheap standard has greater competing power. 
It is asserted that people who are willing to live and multiply on 
a very small income will always tend to displace those who are 
unwilling to live and multiply except on a liberal income. If sheep 
and cattle are allowed to multiply and wander at will over the 
Western ranges, it is plain that the sheep will drive out the cattle, 
not because they are superior in value or in fighting power but 
merely because they are able to nibble closer to the ground and 
to live where cattle would starve. A similar law appears to operate 
throughout the human as well as the animal world. Those who 
can live on the least seem at times able to drive out all others by 
eating them out of house and home. 

It must be confessed that there are some facts which seem to 
support this conclusion. The American laborers on the Pacific 
coast find it very difficult to compete, at least in the unskilled 
trades, with the Chinese and the Japanese. On the Atlantic sea- 
board employers of labor have been able to tap various reservoirs 
of cheap labor, first in northwestern Europe, later in southern and 
eastern Europe. These laborers, having been accustomed to very 
small incomes, are able and willing to work and multiply on in- 
comes so small as to drive out, at once or ultimately, either the 

346 



THE BATTLE OF THE STANDARDS 347 

American laborers or the immigrant laborers of a previous immi- 
gration. The later immigrants drive the earlier immigrants out 
directly by accepting lower wages than the earlier immigrants are 
willing to accept ; they drive them out indirectly by multiplying 
rapidly and thus supplying a new stock of labor where the others 
W0UI4 refuse to multiply. 

In many farming communities it is found likewise that foreign- 
born farmers^ who are willing to live on less than the American- 
born farmers, can, if necessary, pay either a rent or a price for 
land which would bankrupt the American farmer with his higher 
cost of living. Thus the land tends to pass into the hands of those 
.farmers with the cheap standard of living. On the Pacific coast, 
again, the same tendency shows itself. The Chinese and Japanese 
farmers and gardeners are able to buy or rent land and pay a price 
which an American farmer with his higher standard of living 
would find impossible. 

A cheap standard does not always drive out an expensive 
standard. It must be pointed out, however, that not every people 
with a low standard of living has high competing power. The 
Mexican peons have as cheap a standard of living as the Chinese 
coolies, and yet they do not compete successfully even with Amer- 
icans, who have a higher standard of living. In other words, there 
must be coupled with a. cheap standard of living considerable in- 
dustrial efficiency. With equal industrial efficiency, the race with 
a cheaper standard of living seems to have the advantage in 
economic competition. On the other hand, with an equal standard 
of living, the race with the higher industrial efficiency has the same 
advantage in economic competition. In fact, we find that even 
with a more expensive standard of living, the race whose industrial 
efficiency expands in proportion to its cost of living holds its 
advantage in economic competition. 

Competing power is equal to production minus consumption. 
This brings us back to the formula which was used in a previous 
chapter to express the value of a man : V = P — C. The value of a 
man is equal to his production minus his consumption. By his 
value we mean his value to his race or nation. That which he adds 



348 ELEMENTARY ECONOMICS 

to the total resources of his nation in excess of what he extracts 
from those resources is his net contribution to the strength of the 
nation. The nation will be strongest, in the long run, whose aver- 
age citizen has the highest value in this sense. That nation will be 
weakest, in the long run, whose average citizen has the lowest 
value in this sense. But that citizen's value may be increased, not 
simply by reducing his consumption but by increasing the differ- 
ence between his consumption and his production. Adding to his 
production is just as essential as keeping his consumption within 
efficient bounds. 

If we seek a formula which will express the competing power 
of a whole nation, it must be very closely related to the formula 
which expresses the value of one of its citizens. The formula is 
CP =P — C ; that is, the competing power of a nation is equal to its 
production minus its consumption. The nation or the race in 
which there is the widest margin between production and con- 
sumption will win in economic competition against all comers. If 
the American farmer were enough more efficient as a producer than 
the foreign-born farmer to compensate for his higher cost of living, 
he could hold his own indefinitely in economic competition. 

It is not, therefore, the cheap standard of living which invariably 
wins ; it is the efficient standard of living. A race with an expen- 
sive standard of living, provided every dollar of expense adds 
something to its productive efficiency, will always win in competi- 
tion with a race with a cheap standard of living. If, however, the 
expensive standard is made expensive merely by the demand for 
luxuries and means of dissipation, the race is hopelessly handi- 
capped and ultimately must lose in competition with other races. 
But if the cost of living is made high by the demand for strength- 
giving food and recreation, for means of mental stimulation, or 
for books, instruments of precision, and other means of technical 
education, such a standard of living may increase the margin be- 
tween production and consumption rather than diminish it. In 
that case not only can the race possessing such a standard of living 
hold its own in competition at home but the members of that race 
can go anywhere in the world and hold their own in competition 



THE BATTLE OF THE STANDARDS 349 

with the natives. Such a race will be an expanding, colonizing 
race, — wherever its members plant themselves they will succeed 
and remain ; whereas, if their standard of living is merely expen- 
sive without being efficient, they are likely to fail as colonizers. If 
Americans develop an efficient standard of living they will make 
American soil wherever they plant the soles of their feet. 

International competition. A race with a high but inefficient 
standard of living sometimes finds it necessary to protect itself, 
at least within its own boundaries, against the competition of 
races with a cheaper but more efficient standard. Otherwise they 
would find themselves ultimately dispossessed even of their land. 
The race with the cheaper and more efficient standard would not 
only get the jobs in industry but would eventually buy the farms 
and the businesses at prices which the natives would be unable to 
pay. The natives would give way before such a race as inevitably 
as before an army equipped with superior weapons of offense. 

Moreover, the problem is not solved by the mere exclusion from 
our own territory of races with a cheaper and more efficient 
standard of living. The conflict is merely changed to another field, 
and the outcome postponed to a more remote period of time. 
International competition is just as real as individual competition 
within, the nation, though it does not seem so real to the average 
person. In the competition for the markets of the world the nation 
with the cheaper and more efficient standard will have the same 
advantage as it would have in getting jobs or in buying farms and 
businesses within the confines of a given country. 

The race with the expensive or inefficient standard may hold 
certain advantages because of the peculiarities of its geographical 
situation. If it possesses superior soil or superior mineral deposits, 
these physical advantages may compensate, in part at least, for 
the inefficiency of its standard of living and enable it to survive 
in international competition. Superior mineral deposits, however, 
must ultimately be exhausted. Superior soil can be maintained 
only by wise management. The nation that depends upon these 
material advantages for its future strength in international com- 
petition must look well to its problems of conservation. If it does 



350 ELEMENTARY ECONOMICS 

not, eventually it will lose these advantages, and then its more 
expensive standard of living will place it under a severe handicap. 
Though it need not necessarily perish as a nation, at best it will 
live at a "poor dying rate." 

Even under conditions of international peace, here is a form of 
international rivalry which will still persist and under which the 
victory must ultimately go to the race or the nation with the most 
efficient standard of living ; that is, to the race or nation in which 
the production of the average person exceeds his consumption by 
the widest margin. 

The real Armageddon. Here is a real Armageddon, the battle- 
field of the nations — the place for the ultimate contest for su- 
premacy among the various races and nations of the earth. This 
is the field where sooner or later every nation in the world must 
be brought to the test and made to battle for its very existence. 
It is a peaceful contest, but none the less deadly on that account. 
Preparedness for this ultimate and decisive conflict will consist 
in the study of standards of living and the adoption of such 
standards and habits as increase productive efficiency to the 
maximum and reduce the cost of living to the lowest point which 
is consistent with maximum productivity. In the interest of this 
form of preparedness it will be well for us to ponder the advice 
of Pythagoras to his son : " Choose those habits which are best ; 
custom will make them the most agreeable." 

EXERCISES 

1. What is meant by an efficient standard of living? Is it the 
same thing as a cheap standard? 

2. Does a cheap standard of living always drive out an expensive 
standard ? 

3. How will the efficiency of a nation's standard of living affect its 
success in international competition? 



PART SEVEN. REFORM 



Programs 
OF Reform 



CHAPTER XLIII 
COMMUNISM 

f Communism 
Authoritarian -! Socialism 

[The single tax 
r Philosophical 
Anarchistic-^ Exaggerated egoism 

1^ Emotional 
Liberal (the equalization of bargaining power under the sys- 
tem of voluntary agreement among free citizens) 

Compulsion versus freedom. The schemes for the improve- 
ment of social conditions fall into two general classes : first, those 
which rely upon the compulsory power either of a benevolent 
despot or of the mass over the individual ; and, second, those 
which rely upon voluntary work by individuals under the prin- 
ciple of free contract. Among those which rely upon the authority 
of the mass or group over the individual, communism is the most 
extreme. It is sometimes called cooperation, but it is compulsory 
cooperation as distinguished from voluntary cooperation. The 
compulsion is made complete by the fact that the community, or 
the group, owns all the property and the individual owns none. 
All the processes of production and distribution are carried on by 
the community as a whole rather than by individual initiative and 
voluntary agreements among individuals. 

Meaning of communism. Communism may, therefore, be de- 
fined as a type of social organization in which all wealth, including 
both producers' goods and consumers' goods, is owned and con- 
trolled by the community. It differs from socialism in that the 
latter proposes that the community shall own and operate only 
producers' goods, leaving the consumers' goods to be owned and 
enjoyed by individuals. A completely communistic society, for 

353 



354 ELEMENTARY ECONOMICS 

example, would own the dwelling houses and even the food and 
clothing, but would distribute these to the individual members 
very much as they are now distributed within the small group 
which we call the family. 

Relation to anarchism. Theoretically communism would be at 
the opposite end of the scale from anarchism, which is an absence 
of all government, — at least the absence of all compulsory gov- 
ernment. In actual fact, however, it is not always easy to dis- 
tinguish between a communist and an anarchist, as there is a 
considerable group of individuals who call themselves anarchist- 
communists ; that is, they are opposed to any kind of government 
which resembles those with which we are now acquainted. They 
would substitute small communistic groups, each one working 
more or less independently of the others and making such vol- 
untary arrangements for exchange of products as they might find 
to their mutual advantage. In so far as they would oppose all 
compulsion they would be called anarchists ; in so far as they 
would have all wealth owned in common, at least within small 
groups, they would be called communists. Unless, however, the 
small group could exercise some compulsory control over the 
property of the group it would be anarchism rather than com- 
munism. If the group did exercise orderly control over its own 
property to the exclusion of individuals and rival groups, it 
would be compelled to exercise compulsion and would therefore, to 
that extent, cease to be anarchistic and become purely communistic. 

Utopias. Naturally enough communism has never been tried 
on a large scale, though there have been many small experiments. 
It has been advocated by many philosophers, both ancient and 
modern. Many pictures have been drawn of ideal societies in 
which communism was the outstanding feature. Plato, in his 
" Republic," pictured such an ideal commonwealth. Not only was 
all wealth to be held in common but wives and children likewise. 
Defective children, or children who seemed likely to be a burden 
rather than a help to the state, were to be disposed of in early in- 
fancy. Sir Thomas More, in his "Utopia," presented another pic- 
ture of an ideal society based upon communism. In order to give 



COMMUNISM 355 

an impression of reality he pictured some travelers in South 
America who had discovered a new country, in which communism 
prevailed. Francis Bacon gave us a somewhat fragmentary picture 
of his ideal of society in his " New Atlantis." Tommaso Campanella, 
in "The City of the Sun," and various other writers have kept 
alive the ideal of a communistic society. In more recent times we 
have such books as "News from Nowhere," by William Morris; 
"The Cooperative Commonwealth in its Outlines," by Laurence 
Gronlund; and "Looking Backward," by Edward Bellamy. This 
is a list of distinguished writers, and their books make attractive 
reading. They show pretty clearly how persistently the world has 
dreamed of social conditions in which there should be no rivalry 
of interests, no quarreling and bickering over questions of prop- 
erty, — of mine and thine. 

It is not very difficult to show where these pictures are defective 
and how impractical such schemes of social organization are. 
The world at large, or at least a great majority of the people of 
the world, has put very little confidence in these proposals ; but 
probably no generation has been without a certain number of 
spirits who have retained their belief in those peculiar ideals of 
justice and economy which these Utopian works have set forth. 

Experiments: the primitive Christians. Nor have actual ex- 
periments been wanting. The primitive Christian Church is fre- 
quently referred to as an example of communism. One or two 
passages in the Acts of the Apostles indicate that the first Chris- 
tians, at least, maintained a communistic fund for the maintenance 
of impecunious members. For a short time they appear to have 
put practically all of their possessions into a common fund. It 
will also be noticed that they not only put their possessions into a 
common fund but they stopped working and remained together 
in one place, awaiting the second coming of the Lord. This makes 
it appear as though communism were not with them an ideal 
scheme of social organization, but merely a convenient arrange- 
ment by means of which they could live while preparing for the 
end of the world and their sudden translation to heaven. They 
soon went back to work and forgot their communism. 



356 ELEMENTARY ECONOMICS 

The Spartans. The Spartan commonwealth is likewise re- 
ferred to as a communistic society. According to the account 
given in Plutarch's ^^Life of Lycurgus/' there were many com- 
munistic features about the life of the Spartans. It appears to 
have been the communism of a military camp, however, for the 
Spartans themselves were only a, small clan, or caste, ruling over 
a much larger population of subject people. In order that they 
might be strong in a military sense, and hold the masses of the 
people in subjection, they organized themselves very much as a 
military camp has always been organized. There was no com- 
munism whatever for the mass of the people. It extended only to 
the small aristocratic and ruling class called Spartans. 

The monasteries. Most of the monasteries of the Middle Ages 
were organized on a communistic basis. They also practiced celi- 
bacy, showing that they did not regard communism as the ideal 
basis of a continuing human society. The whole monastic life was 
organized for the purpose of promoting spirituality rather than 
for the purpose of reforming human society. 

The Taborites. Certain extreme sects among the early Prot- 
estants attempted some kind of communistic life without celibacy, 
but never made much of a success. Conspicuous among these 
were the Taborites, an extreme faction of the followers of John 
Huss, the Bohemian reformer. They withdrew from the city of 
Prague and started a community on a hill to which they gave the 
name of "Mount Tabor." They hence became known as the 
Taborites. So long as they were thoroughly united by their re- 
ligious sentiments they worked very successfully, not only in pro- 
ductive industry but even in war, for the great Austrian Empire 
sent army after army against them. They defeated the imperial 
armies because of the superiority of their organization. But 
eventually dissensions arose among them; they were divided and 
overthrown, and their community was broken up. 

American experiments. America has been a fruitful field for 
the trying out of all sorts of experiments. Many of the first 
colonists came here because they were inspired by religious senti- 
ments. They founded colonies where their religious ideas could 



COMMUNISM 357 

flourish. This continent presented a virgin field where people with 
peculiar ideas of religious organization or of social economy could 
come and put their ideals to the test. 

The outline on the following page gives a rough classification of 
the more important of these experiments. There were many not 
included in this list, which were either unimportant as to numbers 
or so short-lived as to make them unworthy of mention. It will be 
noticed that the long-lived communities were all religious in their 
nature. Of the nonreligious communities only one, namely, the 
Icarians, lasted a single generation, whereas several of the re- 
ligious communities have lasted half a century, and one group 
of communities (the Shakers) has several colonies that have sur- 
vived for more than a century. 

Religious communities. Many of the religious communities, 
it will be noticed, are of foreign origin, and most of these are of 
German origin. The Shakers are placed among those of American 
origin. As a religious sect the Shakers originated in England, but 
they made their experiments in communism in this country. They 
have established numerous colonies from Maine to Kentucky. 
They are celibates, and therefore their continuing existence de- 
pends upon their ability to make converts. This they have failed 
to do in recent years, and consequently the Shaker communities 
are dying out as the old people drop away. 

The Perfectionists originated in Vermont under the leadership 
of Mr. John Humphrey Noyes. They afterwards moved to Oneida, 
New York. They have given up communism and have organized 
themselves in the form of a joint-stock society and are still prosper- 
ous and doing a thriving business, having found that the practical 
experience of the real world is a better guide than pure idealism. 

A multitude of other experiments of a more or less religious 
nature have been carried out by faith healers, Adventists, and 
other people of rather extreme religious views. 

Of the religious communities of foreign origin that at Ephrata, 
Pennsylvania, was the first to be organized on a durable basis in 
this country. Like the Shakers, they were celibates and were 
therefore doomed to extinction. 



358 



ELEMENTARY ECONOMICS 



American 

Communistic-^ 

Societies i 



The Shakers (numerous colonies), 

Maine to Kentucky, 1787- 
The Perfectionists of Oneida, N.Y., 

1848-1879 
Zion City, 111., 1 890-1 896 
Jemima Wilkinson'sNew Jerusalem, 

N.Y., 1786-1820 
Celesta, Pa., 1-852-1864 
rOf American Salem-on-Erie, N.Y., 1867- 

origin ] The Woman's Commonwealth, Tex. 

and Washington (D. C), 1880- 
The Lord's Farm, N.J., 1877 
Shalam, or the Children's Land, 

N. Mex., 1884-1901 
Estero, Fla., 1904- 
The Christian Commonwealth, Ga., 
'Religious^ 1896- 

l The House of David, Mich. (?) 
'Ephrata, Pa., 1732- 
The Harmonists, Pa., 1803- 
The Separatists of Zoar, Ohio, 

1819-1898 
The Amana Society, Iowa, 1843- 
The Bishop Hill Colony, 111., 1846- 

1862 
The Bruederhof Communities, 

S. Dak., 1862- 
The Waldensian Colonies, N. C. 

and Tex., 1893- 
St. Nazianz Colony, Wis., 1854 
J New Harmony, Ind., 1825-1827 
\ Yellow Springs, Ohio, 1824 
Brook Farm, Mass., 1841-1847 
Fruitlands, Mass., 1843 
Hopedale, Mass., 1841-1858 
North American Phalanx, N. J., 

1843-1856 
WisconsinPhalanx,Wis.,i844-i850 
Northarnpton Association, Mass., 
Non- 1842-1846 

s. religious ] (^Numerous others 

f Nauvoo, 111., 1849-1866 
The Icarians^ Cheltenham, Mo., 1858-1864 
I Icaria, Iowa, 1860-1895 
Skaneateles Community, N. Y., 

1844-1846 
Polish Colony, Anaheim, Calif., 

1876-1878 
The Ruskin Commonwealth, Ga., 

1896-1901 
The Cooperative Brotherhood, 

Wash., 1898- 
Equality Colony, Wash., 1897- 
(^The Straight Edgers, N.Y., 1899- 

1 Based on " American Communities," by W. A. Hinds. Chicago, 1908. 



Of foreign 
origin 



Owenistic 



Fourieristic 



, Independent 



COMMUNISM 



359 



One of the most successful of all these experiments was started 
in western Pennsylvania by some German pietists among the fol- 
lowers of one Georg Rapp, from whom they were given the name 
"Rappists." They afterwards moved to Indiana, where they so- 
journed for a time at New Harmony in the southwestern corner 
of the state. After a few years they sold out and moved back to 
Pennsylvania. Their colony, known as Economy, was a place for 
sightseers for many years. 

The Separatists of Zoar and the Amana Society were somewhat 
similar in their origin and in their subsequent history. They did 
not practice celibacy. They prospered amazingly and presented 
a very attractive life as seen by visitors from the outside. They 
were animated by intense religious enthusiasm and by devotion to 
their own leaders. The Separatists of Zoar, however, gave up 
communism in 1898, largely because the younger generation had 
lost something of the religious zeal of the older generations and 
decided that they preferred the individualistic type of life to the 
communistic. The Amana Society is still flourishing, and the 
people are apparently satisfied. 

The Bishop Hill Colony in Illinois was a Swedish colony"; its 
character and organization resembled most of the others. When 
they lost their intense religious zeal they likewise lost their en- 
thusiasm for the communistic type of life and gave it up. 

A series of communistic societies is still flourishing in South 
Dakota. They are known as the Brotherhood Societies. 

Several communities of North Italian Protestants have flourished 
in the South, particularly in Valdese, North Carolina, and near 
Gainesville, Texas. 

Nonreligious communities. In 1822 Robert Owen, a great 
English philanthropist and a firm believer in what was then called 
socialism, came to America for the purpose of establishing an ideal 
community. He delivered many addresses and created much en- 
thusiasm. In looking about for a location he found that the Har- 
monists, who were then living in New Harmony, Indiana, were 
desirous of selling out and moving back to Pennsylvania. He 
bought all their real estate and proceeded to establish a colony of 



360 ELEMENTARY ECONOMICS 

his own. He was a man of great ability, who had made a fortune 
of his own, which he devoted liberally to the propagation of his 
ideas. His colony, however, was made up of idealists who were 
more in the habit of talking about their theories of society than of 
working to produce wealth ; it was a good illustration of the in- 
ability of any community to live on talk. It lasted a little over 
two years, largely at the expense of Mr. Owen. Numerous other 
experiments of the same kind were tried, none of which lasted for a 
single year. One at Yellow Springs, Ohio, lasted for several months. 

About 1 84 1 the works of a French communist, Fourier, were 
translated and published in this country. They created, great en- 
thusiasm, and a large number of experiments were made. The 
most notable of these was Brook Farm, Massachusetts, which was 
started independently but afterward adopted the plan of Fourier. 
This experiment was notable mainly because of the great names 
in its list of members. Some of the most distinguished men and 
women of that day, in letters and in scholarship, joined the Brook 
Farm community. The most successful of the Fourier experiments, 
however, was the North American Phalanx in New Jersey. It 
lasted for thirteen years. An experiment at Hopedale, Massachu- 
setts, was only partially communistic; it lasted seventeen years 
and then became a joint-stock association. 

As indicated above, the most successful of all the nonreligious 
communities in this country was the Icarian community in Iowa. 
They were followers of Etienne Cabet, a French communist, who 
wrote a very attractive book entitled "A Voyage in Icaria." It 
awoke the slumbering idealism of many French people who desired 
to form a commonwealth after the description of the life of the 
Icarians. Cabet led his followers to this country and landed in 
New Orleans, hoping to establish them in northeastern Texas. 
The land proved inaccessible and the climate not very agreeable. 
They returned to New Orleans discouraged, but learned that 
the Mormons had recently been driven out of Nauvoo, Illinois. 
They proceeded by boat to Nauvoo and established themselves, 
finding plenty of vacant houses and factory buildings. Here 
they prospered for a number of years, but they wished to find a 



COMMUNISM 361 

situation where they could be more to themselves. A tract of land 
was bought in southwestern Iowa, not very far from the present 
town of Corning. There they lived under the communistic system 
until 1895, when they gave up communism and came over to an 
individualistic regime. 

A large number of other societies have been established by the 
followers both of Robert Owen and of Fourier and in recent years 
by the admirers of Laurence Gronlund and Edward Bellamy. 

Results. It may seem as though the experiences of these nu- 
merous communistic societies tended to throw discredit upon all 
communistic ideals. The advocates of communism, however, insist 
that the principles of communism are still sound, even though a 
thousand communities fail. To an impartial observer it looks as 
though communism might work very well if people were built on 
a communistic plan. If they have a passion for communism or a 
powerful religious emotion which will overcome their individual- 
istic and particularistic tendencies, they may live together peaceably 
under communism. Unless they are inspired with religious zeal 
or a genuine passion for communism, it seems as though the 
natural individuality, not to say the contrariness, of human nature 
would continue to break up all communistic societies in the future 
as it has in the past. 

But why, it may be asked, will not communism work in a large 
national group as it now works in a small family group ? It does 
not seem to work particularly well in some families. In those few 
abnormal cases where the members of the "family have no particular 
affection for one another, the question of the division of the family 
funds is a difficult one. If the father is selfish and cares nothing 
for the others, he becomes an autocrat and spends all or the 
greater part of his income upon himself. If the others feel the 
same way toward him and one another, they quarrel among them- 
selves. But in a normal case, where an intense affection for one 
another prevails, there is no quarreling and everything is shared 
in common. 

If it were possible for the members of a large national group 
to feel toward one another as the members of a normal family 



362 ELEMENTARY ECONOMICS 



feel, communism or almost any other system might work well 
But the average man's capacity for affection is limited. It would 
take one with a genius for friendship to feel a warm affection for 
even a hundred separate individuals, to say nothing of a hundred 
million. It would be practically impossible for any of us to feel 
toward each other and every one of a hundred million people, only 
a few of whom we have ever seen, precisely as we do toward our 
own brothers and sisters, fathers and mothers, and other very 
near relatives. This is sufficient reason why communism cannot 
be made to work well. It would probably work very much as a 
family works when family affection has disappeared. 

EXERCISES 

1. How should you classify the different programs of reform? 

2. What is communism? How is it related to anarchism? 

3. What is meant by a Utopia ? 

4. Have there been any experiments in communism? 

5. Where have most of these experiments been tried? 

6. Have religious or nonreligious experiments had the greater 
success ? 

7. Give an account of some of the more successful? 

8. Why have they generally failed? 

9. In what sense is a family communistic? 

10. Does the family succeed where there is no family affection ? 

11. Is it likely that any other form of communism would succeed 
without a strong bond of affection? 



1 



CHAPTER XLIV 
SOCIALISM 

Socialism and communism have shifted meanings. The term 
"socialism" has a variety of meanings, though there are certain 
elements common to every definition. During the last seventy- 
five years the meanings attached to socialism and communism 
have been shifted. That which is now known as socialism was 
formerly known as communism. Karl Marx, who is regarded as 
the great apostle of modern socialism, called himself a communist. 
On the other hand, "socialism" was applied to general schemes for 
social amelioration which did not involve any fundamental change 
in the organization of society. Communism, however, fell into 
disrepute, and its followers discarded the name and began calling 
themselves socialists. 

There is a tendency on the part of followers of any program or 
movement to define their program in the most favorable terms 
possible. This applies to socialists as well as to other propagan- 
dists. Sometimes this tendency leads to a definition of socialism 
which does not define, but which includes the opponents as well 
as the defenders of socialism. When it is said, for example, that 
socialism teaches the doctrine that only he who produces shall 
consume, it may be replied, "So also does individualism" and 
practically every other "ism" that has anything to do with the 
production and distribution of wealth; when it is said that 
socialism teaches the doctrine of equality of opportunity, it may 
be replied, "So also does individualism" and all the other "isms." 

The difference between a socialist and a nonsocialist In 
order to define socialism we must find something which will com- 
pletely distinguish the socialist from the nonsocialist. The only 
definition that will do this is the following: A socialist is one who 
believes that the community, the public, or the government should 

363 



364 ELEMENTARY ECONOMICS 

own and operate the means of production, leaving to individuals 
the ownership of most articles of consumption. By the means of 
production are meant practically all that is included under the 
names "land" and "capital" (farms, factories, railroads, mercan- 
tile houses, and office buildings would all be included) ; under the 
program of socialism all these things would be owned and operated 
by the community, the public, or the government. This would 
mean that every individual would be in the employ of the govern- 
ment in one way or another. Since there would be no private 
enterprise, no one could start a farm, a factory, a store, or any 
business enterprise of his own. Since no one could start any such 
enterprise, no one could be employed by a private employer. Since 
no one could be either in his own employ or in the employ of any 
private organization, everyone would have to be in the employ of 
the government. 

Distinction between socialism and populism. There is some 
difference of opinion among socialists as to how far this principle 
of government ownership and operation should extend. Some are 
willing to stop with trusts and monopolies. This, however, is 
populism rather than socialism. It is based not on a theory of 
capital but on a theory of monopoly. Many people who favor the 
private ownership of capital are opposed to monopoly and believe 
that the best way to curb monopoly is to turn all monopolistic 
enterprises over to the state. Such a person might reject utterly all 
socialistic theories respecting capital. Moreover, every thorough- 
going socialist really bases his conclusions on his theory of capital. 
The work of Karl Marx, "Capital," has been called the Bible 
of the modern socialist. This book pays very little attention to 
the question of monopoly ; it consists almost entirely of an attack 
upon private capital and production under private enterprise. 
From Marx's point of view it is not monopolized capital, but 
capital as such, that gives its owner the power to exploit and de- 
fraud other people. The capital belonging to a farmer as well as 
that belonging to a great trust, to a small manufacturer as well as 
to a large manufacturer, to the driver of a jitney bus as well as to 
a street-car company, is to be owned and operated by the public. 



SOCIALISM 365 

On the other hand, the slogan "Let the nation own the uusts" 
has nothing to do with capital as such. Such a program is based 
entirely on a theory of monopoly, which is the essence of populism 
rather than of socialism. Those who attack monopoly may quite 
consistently hold to the idea that capital which is not monopolized 
is a help rather than a hindrance to labor, that he who accumulates 
capital by consuming less than his income is benefiting rather than 
injuring labor, and that therefore everybody ought to be encour- 
aged to accumulate capital and invest it in productive enterprises. 
From this point of view the individual who has accumulated 
capital and invested it in a productive enterprise has not only 
increased the productivity of the community but is entitled to 
some reward for that service which he has performed. This 
reward would be called interest. The populist, therefore, would 
approve of the receipt of interest on the part of the owner of 
unmonopolized capital. 

Socialism opposed to private capital. All the great authorita- 
tive books on socialism are fundamentally opposed to interest or 
to anyone's receiving any income from the ownership of capital, or 
any advantage from his own accumulations. If labor is the only 
producer of wealth, the saver and accumulator is not a producer 
and is therefore not entitled to any share in the product. Since 
interest is the share which goes to the accumulator and investor, 
it cannot be justified under the socialistic philosophy. 

Difference between a socialist and a liberalist. The defini- 
tion of a socialist as one who believes in the common, public, or 
government ownership of all the means of production separates 
the socialist not only from the populist and the communist but 
from the liberalist as well. Moreover, this is the only definition 
which will at all distinguish the socialist from the liberalist. The 
liberalist is quite as desirous of economic justice and of equality of 
opportunity as the socialist is, but he believes that the liberal pro- 
gram is better adapted to the securing of those ends than the 
socialist program. The liberal program permits the private owner- 
ship of capital, and it also permits the receipt of interest as a pri- 
vate reward, on the ground that the accumulation of capital is a 



366 ELEMENTARY ECONOMICS 

productive service, — not that it is philanthropic, but that it is 
useful to society and worthy of a reward. 

In order to becloud the issue it is sometimes stated that the 
socialist believes that men should be paid for doing things, and 
the liberalist that men should be paid for owping things. The 
liberalist does not believe that men should be paid for owning 
things unless the ownership is a symptom of their having done 
something which was useful. If two men, A and B, have been 
doing equally good work with their hands and their heads and 
have earned equal incomes, they should be paid the same accord- 
ing to the liberalist as well as the socialist. If, however, A con- 
sumes all his income, but B invests a part of his in the tools of 
production, the liberalist believes that B has done better than A. 
If everybody did as A does, the nation's stock of tools would never 
increase ; if everybody did as B does, the nation's stock of tools 
would increase rapidly. The more citizens it has of the B type 
the more prosperous will the nation become ; the more it has of the 
A type the less prosperous will it become. It is very important 
that men should be encouraged to join the ranks of the B's rather 
than of the A's. The liberalist therefore holds that there should 
be some inducement to men to do what B has done ; namely, to 
invest a part of their income rather than to consume it all. 

There is no other definition of socialist or socialism which will 
separate the socialist from the nonsocialist or which will particu- 
larly separate him from the liberalist. The term "liberalist" is 
justified because the liberalist believes that, so far as possible, 
each individual should be at liberty to start his own enterprise if 
he is so disposed, or to work for someone else if he prefers, — 
that he should be at liberty to work for private individuals or to 
work for the government, according as he can make the most satis- 
factory voluntary agreements. In short, the liberalist is willing to 
trust men with the power of free contract, whereas the socialist 
relies mainly on the government's power of compulsion. 

Socialism involves more use of the government's power of 
compulsion than liberalism does. It has been said that the 
power to tax is the only capital the government needs. The power 



SOCIALISM 367 

to tax is compulsion. In order to carry out a socialist program the 
public would have to use its power of compulsion in many ways. 
It would have to prohibit competition by private individuals 
against the state, as it now forbids private individuals to compete 
with the post office in the carrying of first-class mail. It would 
have to use its taxing power to compel the payment of deficits 
whenever deficits occurred. 

The liberalist, on the other hand, proposes to reduce to a mini- 
mum the compulsion of the government over the individual. An 
industry which cannot be carried on without any compulsion 
whatsoever had probably better be left to die, unless it be one 
which is necessary for military protection. 

If, for example, an individual who desires to manufacture shoes 
cannot manufacture them successfully without the power of com- 
pulsion, he should not manufacture them at all. If he can buy 
his raw materials on the open market, hire his labor on the 
open market, and sell his product on the open market, making use 
of voluntary exchange and voluntary agreement in every case, and 
can manage to make a profit out of his business, he is entitled to 
remain in business. It shows that he is efficient enough to as- 
semble the various factors of production in such a way as to pro- 
duce an article which is worth more than the cost of the factors of 
production. This is highly economical. If, in order to make a 
living, he had to be paid out of the public treasury, and the 
public had to make use of its power of taxation in order to get 
the wherewithal to pay his salary, there is a strong probability 
that the product would not be worth as much as the factors which 
entered into it. In that case the power to tax would have to be 
made use of to keep the business going ; but the fact that com- 
pulsion was necessary would be proof that it ought not to be used, 
but that the business should die a natural death. 

Where there is no free bargain and sale, — where consumers are 
not at liberty to turn from one producer to another and buy what- 
ever suits them best, where the producers of raw material are not 
at liberty to sell to any manufacturer who will pay them the 
highest price, and where labor likewise is not free to bargain to 



368 ELEMENTARY ECONOMICS 

its own advantage, — there is no assurance that the maximum 
economy will be secured. 

Compulsion sometimes necessary. It is not to be inferred, 
however, that the liberalist is an anarchist and therefore opposed 
to all exercise of compulsion or governmental power. He is one 
who believes that a great many lines of production, can be safely 
and successfully carried on without the use of compulsion, under 
voluntary agreements, free contract and sale, and individual initia- 
tive. He also quite frankly recognizes that there are many things 
which cannot be done in this way. 

For example, the forestation of certain mountain slopes would 
be undertaken by private enterprise only when the enterprisers 
thought that it would be profitable to them. But, although it 
might be unprofitable when considered by itself, it might still be 
highly profitable when considered from the viewpoint of the nation 
as a whole. If the deforestation of high mountain slopes results 
in the overflow of streams and the destruction of valuable land 
along the lower watercourses, this is a matter which affects the 
country as a whole but might not interest the individual owners of 
the high slopes. If they found it profitable to cut off the timber and 
sell it, they would do so even though property of much greater value 
a few hundred miles away on the river bottoms were destroyed. 

Here would be a clear case where government enterprise would 
be superior to private enterprise. But similar reasoning would in 
some cases prove the superiority of international enterprise over 
government enterprise. It often happens that the high mountain 
slopes are within the territory of one nation and the river bottoms 
in the territory of another. In that case the nation owning the 
high mountain slopes would have no interest in protecting the river 
bottoms. Nothing but an international arrangement could solve 
that problem. 

Again, take such an enterprise as the building of lighthouses. 
The private individual who built a lighthouse on a rocky coast 
would scarcely be able to collect toll or to get payment for the 
utility which he was furnishing. Not having the power of com- 
pulsion, he could not force mariners to pay, nor could he tax the 



SOCIALISM 369 

public at large in order to build and maintain lighthouses. The 
government alone has this power of compulsory collection. In any- 
other case (and there are many of them) where it can be shown 
that freedom of contract will not succeed in getting an important 
work done or an important utility produced, the liberalist is willing 
to see compulsion used. 

"Socialism," like "vegetarianism," an exclusive term. "Lib- 
eralism" is therefore not an exclusive term, as "socialism" seems 
to be. One is not a vegetarian by virtue of the fact that one 
sometimes eats vegetable food; one is a vegetarian only when 
one refuses to eat anything else. A liberalist with respect to food 
is willing to eat any kind which seems to him desirable. In a 
similar sense, one is not a socialist by virtue of the fact that one 
is willing that the government should do some things ; one is a 
socialist only when one believes that the government should do 
everything or that private individuals should not carry on any 
productive industry or own any productive property. The liber- 
alist is willing that industry shall be carried on in any way 
that seems to promise desirable results. If an individual farmer 
can grow corn successfully, the liberalist is willing that he shall 
do so and likewise make a profit; and so on. He perhaps 
goes a step farther and believes that preference should be given to 
free and voluntary business arrangements rather than to compul- 
sion, and that compulsion should be used only when the voluntary 
system fails to get desirable things done. 

Criticism always easy. As to the merits of the socialistic pro- 
gram as compared with other programs, there will always be con- 
siderable differences of opinion. It is not difficult to point out 
with a great deal of particularity the evils that result from a liberal 
policy. The unfortunate condition of those people who are not 
in a position to bargain to their own advantage is perhaps the 
strongest argument used by the present-day socialists. 

Unfortunately it is easy to find many communities in which 
certain classes of laboring men find it impossible to get good 
wages by the method of voluntary agreement, whereas other people 
who use this method get larger incomes than are necessary or 



370 ELEMENTARY ECONOMICS 

desirable. This condition, however, is not confined to labor. 
Anyone who is trying to sell anything with which the market is 
oversupplied is in a more or less helpless position. When more is 
offered for sale than buyers care to buy, the seller is very depend- 
ent, whereas the buyer is independent. Under the system of volun- 
tary agreement the seller must take what he can persuade the 
buyer to pay, and the buyer can take his choice. If, however, 
the conditions are reversed and buyers want to buy more than 
sellers are willing to sell, then buyers are very dependent; they 
must take whatever they can persuade the sellers to sell, whereas 
sellers are independent and can take their choice. 

It happens that certain kinds of labor seem almost chronically 
to be in this position of dependence. They always, and rightly, 
evoke sympathy. There are two ways, however, of correcting the 
difficulty. One is to substitute the system of compulsion for the 
system of voluntary agreement ; the other is to make that kind of 
labor scarce and hard to find and to increase the demand for it. 

Seeing that these unskilled laborers are so frequently at a dis- 
advantage under the system of voluntary agreement, it looks 
rather obvious to some people that something else must be substi- 
tuted. But the liberalists maintain that labor is not necessarily, 
and not always, at a disadvantage under the system of voluntary 
agreement. If you can distribute the labor supply so that there 
will not be too much of one kind in proportion to the other factors, 
then the laborers will be in a position of great independence. 

It is not difficult to point out instances where the laborer is in- 
dependent and the capitalist dependent, — where the preservation 
of the capitalist's property, where even his income itself, depends 
on getting labor when there is not enough labor to go around. In 
such cases the laborer can take his choice of employers. There 
need not be the slightest difficulty in creating such conditions for 
labor in general, but it will require the following of a program 
radically different from that of the socialist. It looks much easier 
merely to exercise the compulsory power of the state and cure the 
difficulty at one stroke. Not many difficulties, however, are perma- 
nently cured at one stroke or by the exercise of compulsion. 



SOCIALISM 371 

Why there are socialists. When the victim of a wasting sick- 
ness goes to a physician for help, he is very likely to be disap- 
pointed. The physician, if he is scientific and therefore honest, 
can seldom promise him a definite cure. Being a scientific man, 
he can point out the causes which produce the illness and say that, 
if at some time in the past the patient had pursued different habits, 
he would not have become ill. This, however, is cold comfort to 
the sick man who is suffering intense pain. Or the physician may 
prescribe a course of treatment which, if rigidly followed for a 
period of time, will tend to remove the causes of the illness and 
eventually improve the patient's condition. This likewise is cold 
comfort to the man in pain, who wants immediate relief. Such 
a man is in a good frame of mind to lend a favorable ear to the 
" doctor " with a specific remedy who promises him a specific cure. 

Similarly, the man who is in the grip of poverty, as well as his 
sympathizers, is likely to be disappointed with the program of the 
economist. The economist, if he is a scientific man and therefore 
honest, will be compelled to say that there is no immediate relief 
which is not likely to produce worse results in the future. Being 
a scientific man, he can point out the conditions which tend to 
produce poverty and can prescribe policies which, if they had been 
pursued consistently for a number of years, would have prevented 
the poverty which now exists. This is cold comfort to the man 
who is already suffering from poverty and longing for relief. Such 
a man is in a condition to lend a favorable ear to the doctor with 
a specific remedy. The obvious and specific remedy which is 
commonly urged by socialists is the compulsory power of the state 
or of the mass over the individual. 



EXERCISES 

1. Why have "socialism" and "communism" shifted meanings? 

2. What is the present meaning of the word "socialism"? 

3. How should you distinguish between a socialist and a nonsocialist ? 

4. What is the distinction between socialism and populism? 

5. What is the difference between a socialist and a liberalist ? 



CHAPTER XLV 
THE SINGLE TAX 

Meaning of the single tax. By the single tax is meant a policj/ 
under which all the public revenue is to be raised by a single tax 
on land value. One of the most persistent misinterpretations of 
the single tax is to assume that it means a tax to be raised on real 
estate rather than on land values. Land value is defined as the 
value of the land itself irrespective of all improvements, such as 
ditching, draining, fencing, the planting of trees, and the erection 
of buildings. In short, everything done on the land itself to im- 
prove the value of an estate is classed as an improvement and, 
under the single tax, would be exempt from taxation. This leaves 
nothing except the location value and the fertility to be taxed. 

The physiocrats, believers in the "rule of nature," believed 
in the impot unique. The original advocates of the single tax were 
a group of French economists called physiocrats. It was their 
belief that land was the original and fundamental source of all 
wealth, and that the rent of land was the only real surplus wealth 
which the community ever produced. From their point of view, 
rent was due to the bounty of nature. They believed that every 
other tax must eventually be paid out of rent anyway, wherever 
it may have been laid by the government. If you tax the prod- 
ucts of industry, they said, there is no surplus out of which the- 
tax can be paid ; as a result you either raise the price of the prod- 
ucts or depress the price of the raw materials. If you tax labor, 
you must raise wages accordingly ; if you tax enterprise, you must 
raise profits. Every tax, therefore, is shifted from one to another 
till it reaches the landowner, who alone has a surplus out of which 
it can be paid. The landowner cannot shift it any farther, and, 
since he must ultimately pay the tax, they argued that it was 
better for him to pay it directly in the first place than indirectly 

372 



THE SINGLE TAX 373 

after several shiftings from one person to another. They regarded 
the single tax as a good system of taxation for raising revenue, not 
as an engine of social reform. 

The classical economist regarded rent as a peculiar income. 
The idea that landowners who live entirely upon the rent of land 
are in a peculiar sense nonproducers is by no means new. Adam 
Smith ^ wrote, in 1776, "As soon as the land of any country has 
all become private property, the landlords, like all other men, love 
to reap where they never sowed, and demand a rent even for its 
natural produce." And again, "They [the landlords] are the 
only one of the three orders whose revenue costs them neither labor 
nor care, but comes to them, as it were, of its own accord, and 
independent of any plan or project of their own."^ Economists 
from Adam Smith down have generally agreed on this point, 
though they have not generally agreed that this is the great cause 
of poverty nor that the abolition of ground rent would be a social 
panacea. 

Ricardo, in developing his theory of rent, laid emphasis upon 
the fact that rent arises from the niggardliness rather than from 
the bounty of nature, thus taking a position opposed to that 
of the French physiocrats. This niggardliness shows itself in two 
ways : first, the best land is always limited in area ; second, its 
productivity is limited. On any given area the amount of any 
crop which can be produced is limited ; and even before that limit 
is reached, diminishing returns are received from successive applica- 
tions of labor and capital. Because of these limitations upon the 
productivity of the best land, poorer and poorer land must be 
taken into cultivation as the demand for products increases. The 
fortunate possessors of the better grades of land are then in a 
position to demand a rent for their land. 

The single tax made an engine of social reform by Henry 
George. It was the late Henry George, in his book entitled " Prog- 
ress and Poverty," who seized upon these ideas to make the single 
tax an engine of social reform. He began his inquiry by pointing 

1 Wealth of Nations, Bk. I, chap. vi. 

2 Ibid. Bk. I, chap. xi. 



374 ELEMENTARY ECONOMICS 

out that even in the midst of plenty, poverty still persisted. He 
stated that though the productive power of the world had increased 
rnany fold through mechanical improvements, nevertheless large 
numbers of people remained in poverty. In fact, he went so far 
as to insist that increasing numbers were compelled to live in 
conditions of increasing squalor. 

The persistence of poverty the great reproach upon civiliza- 
tion. This phenomenon of the persistence of poverty in spite of 
the world's increase in productive power has been an enigma ever 
since the rise of mechanical industries. Various answers to the 
puzzle have been given. Karl Marx and his followers attributed it 
to the fact that the owners of capital absorb all the benefits of 
the increase in productive power, leaving the nonowners of capital 
no advantage whatsoever. 

It is very easy to say — in fact, it looks like mere arithmetic to 
say — that with the same rate of productiveness, if certain classes 
who are now receiving large incomes should not receive them, there 
would be more left for other people. If the incomes of capitalists 
and landowners were cut off, more would be left for the laborers, 
provided the total production remained the same. It would be 
equally true from an arithmetical standpoint to say that if the 
skilled laborers and the high-salaried people did not receive so 
much, more would be left for the rest, if the rate of production 
remained the same. In other words, if you assume a given rate of 
production and then assume that the incomes of certain classes are 
cut off, you can demonstrate that this would leave more goods for 
the other classes. This, however, is not a convincing argument. 
If anyone performs an important function in society, and thereby 
makes society richer, it cannot be said that by cutting off this 
person's reward for performing his function, society will be im- 
proved. By the cutting off of his reward there is the danger of 
killing the goose that laid the golden eggs ; by so doing you may 
reduce his motive for labor and cause him to perform a less im- 
portant function than he would if he were adequately rewarded 
for his effort. The real question is, therefore, whether the capitalist 
performs a function in society commensurate with the reward 



THE SINGLE TAX 375 

which he receives. If the answer is in the affirmative the cutting 
off of his income would hardly be a help to society. The same 
reasoning applies to the landowner : if he performs a function com- 
mensurate with the reward which he receives, it would obviously 
not help matters to cut off his income. So here again the real 
question is whether or not the landowner performs a function 
commensurate with the reward which he receives. 

Distinction between location value and fertility value. In the 
chapter on Land we saw that the two economic factors in land 
value were location and fertility. In so far as the value of land is 
based primarily on its fertility, that value may be easily destroyed 
and with difficulty replaced ; and, in fact, the land of little fertility 
may, by careful and scientific farming, be greatly increased in 
fertility. This increase would be classed as improvement, and the 
increase in value would be similar to the increase which results 
from ditching, draining, irrigating, fencing, clearing, and other 
forms of improvement. Even where the land possessed original 
fertility — that is, where it is known as virgin soil — it may easily 
deteriorate under bad management or improve under good man- 
agement. It is as much in the interest of society that good 
land be kept from deteriorating as that poor land be improved in 
fertility. If the owner of land is allowed the advantages of any 
improvements in fertility which result from his management, no 
one could, of course, consistently object to it. Again, if he is made 
to suffer some penalty for allowing the land to deteriorate in 
fertility by his bad management, it would seem equally just. 

Putting these two propositions together, it seems as though the 
owner of the land, whether it be good or poor land, should be re- 
warded for any improvement resulting from his good management 
and penalized for any deterioration resulting from his bad manage- 
ment. If the single tax were applied rigidly, and the value not 
only of the location but of the soil itself were taxed away, the 
owner would get neither reward nor penalty. That is to say, if 
he were taxed for the full value of his land while the soil possessed 
its original fertility, he could easily "mine" the soil, as it is 
called ; that is, he could rapidly exhaust the fertility and pocket 



376 ELEMENTARY ECONOMICS 

the temporary advantage from it. Then, after the land became 
less valuable, the tax would have to come down, or the owner 
could abandon the land or turn it over to the state whenever it 
became so poor as not to be worth the tax. 

But if he is allowed the full value of the fertility of his soil, 
he has a much stronger motive for preserving or increasing its 
fertility. In the pursuit of this advantage, or in the warding off 
of the disadvantage of deterioration, he performs an important 
public function, — that of conserving the fertility of the soil. His 
reward will bear some ratio to the value of the service which he 
performs. To cut off his reward would not be to the advantage 
of the public, because the result would be that he would allow the 
soil to deteriorate, and this would result in a smaller production. 
The rest of society, as well as the landowner, would suffer from 
this policy. The single tax would put the owner in the position 
of a tenant who had to pay the state, in the form of a tax, all that 
the land would rent for. Tenants are notoriously careless in the 
matter of conserving soil fertility. 

In respect to location value, this argument scarcely applies. In 
some cases, it is true, the enterprise of the landowner has created 
location value. This occurs when he himself builds a road instead 
of asking the public to do it, or when he beautifies a spot and 
makes it attractive as a place for dwellers, or when he builds a 
trolley line or any other means of access to his land. He may then 
be said to have created the location value of his land. In such 
cases all that we have said regarding fertility value will apply 
also to location value. 

In most cases, however, the location value is not the creation of 
the individual owner but of the general public, since it is the gen- 
eral public, rather than the individual owner, that builds schools, 
libraries, and streets, maintains police systems, and brings various 
utilities within reach. A few notorious cases have been cited of 
men who have bought land favorably situated and have done noth- 
ing to improve it, having even resisted taxation and all improve- 
ments. Yet in spite of such inertia they have found themselves 
rich as the result of the rise in the location value of the land. 



THE SINGLE TAX 



377 



A few such conspicuous cases furnish effective arguments in favor 
of the single tax — at least they excite resentment. 

A land tax not necessarily a single tax. The arguments for 
a single tax are not the same as for a mere increase of the land 
tax. One may favor the increase of taxation upon the location 
value of land without being in any sense of the word a single 
taxer. He may believe in many different taxes, such as the 
inheritance tax, licenses, the income tax, etc. It would be absurd 
to call such a man a single taxer, even though he favored a 
special tax on the location value of land. Again, even though 
one were in the strict sense of the word a single taxer, one might 
advocate it on purely financial grounds, rather than on the 
grounds of social reform ; that is, one might believe that all 
public revenues should be raised from the taxation of location 
values of land merely because he believed that this would be an 
easy way of raising revenue, and not because it would go very 
far toward the curing of poverty. 

The financial arguments in favor of the land tax are fairly 
simple. Land cannot be hidden in the way that much personal 
property is. There may be some difficulty in appraising its value 
for purposes of taxation, but the difficulty is not greater than 
that of appraising for purposes of taxation the value of personal 
property, buildings, or anything else which is taxable. 

Again, a tax on location values could hardly be said to have a 
repressive effect at all. If the tax on the products of industries 
tends to discourage production, this cannot be said to be true 
of land. Since location values are not produced by the payer of 
the tax, there is no production to discourage. You may tax land 
and still have it in undiminished quantities. As a cold-blooded 
financial proposition this has some merit. Even though one may 
take away from the landowner all its location value, the land 
itself still exists in undiminished quantities. 

Arguments for the single tax. The argument for the single 
tax as an engine of social reform rests on three general propo- 
sitions. In the first place, the single taxers maintain, since those 
who receive rent because of the location of their land create 



378 ELEMENTARY ECONOMICS 

nothing in return for the rent they receive, their incomes are 
merely subtracted from those of the rest of society. If their 
incomes should be taken away, this would not in any degree 
diminish the total productiveness of the community. By a mere 
process of arithmetic it is easy to show that if the incomes which 
they now receive were divided among the rest of the people, 
these other people would have larger incomes. 

Is land kept out of use for speculation? In the second 
place, it is alleged that a great deal of land is kept out of use 
for speculative purposes and that a high tax on land values 
would force this land into use. The validity of this argument is 
doubtful. The illustrations given are usually those of tracts of 
land found lying idle in cities and suburbs. The owners are holding 
them apparently in the hope of getting a higher price in the 
future. It is easy to jump to the conclusion that if there were 
no prospect of gain by doing so, the owners would at once find 
a use for the land or sell it to others who could use it ; but this 
does not take into consideration the fact that there may be no 
immediate use to which the owner could profitably put the land. 

The only common cases in which the land is actually kept 
out of use because of speculation are where garden land is pur- 
chased and divided into building lots in advance of the demand 
for them. After the division has been made the land is no 
longer suitable for farm land or garden tracts because it is 
broken up into parcels too small to be cultivated economically. 
Meanwhile the public may be slow in buying the lots for building. 
The result is that for a number of years this land practically 
goes to waste. 

A heavy tax on land would exempt other forms of property. 
A third argument for the single tax is to the effect that when 
a large amount of revenue is raised from a tax on land, there 
is no necessity for so high a tax, probably no necessity for any 
tax whatever, on other things. This reduction of taxation on 
other forms of property would serve as a stimulus to greater 
production. When, for instance, a farmer finds that his cattle, 
his crops, and his buildings are not taxed, or not taxed so 



THE SINGLE TAX 379 

heavily, he is encouraged to develop these forms of property. 
If, as stated above, the taxation of location values of land 
enables the public to raise enough revenue from this source, and 
thereby to eliminate the taxes on all other things, this will tend 
to stimulate business and production in general. This argument 
is based on the repressive character of other forms of taxation 
than the land tax. 

Putting idle talent to work. A fourth argument, not usually 
brought forward by single taxers, may be added to this list. 
In so far as certain owners of valuable land are enabled to live 
on the rent which comes to them because of its location value, 
and to remain idle instead of doing productive work, the com- 
munity loses the productive power of these men. This is more 
important than all the land kept out of use for speculative 
purposes. If such persons were deprived of their incomes and 
thereby forced to do productive work, the community would 
gain by this addition to its list of productive workers. This 
would make for national prosperity. 

EXERCISES 

1. What is meant by the single tax? 

2. Who were the originad advocates of the single tax? 

3. On what ground did they advocate it? 

4. Has it generally been recognized that rent is a peculiar income ? 

5. By whom was the single tax made an engine of social reform? 

6. What is the distinction between location value and fertility 
value in land? 

7. Do all single taxers wish to tax both forms of value ? 

8. x\re there any reasons for distinguishing between these two parts 
of the value of land? 

9. What are the leading arguments for the single tax? 

10. Is land commonly held out of use for speculative purposes? 

11. Are men ever enabled to live without work because they are 
able to live on the rent of land? 



CHAPTER XLVI 
ANARCHISM 

Anarchism and socialism. In some respects anarchism is the 
diametric opposite of socialism ; in other respects it is somewhat 
similar to socialism. They represent opposite tendencies in that 
the socialist proposes to enlarge the power and function either 
of the state or of some kind of public organization, whereas the 
anarchist proposes to eliminate all authority, or all control of 
one person by another. Such organization as shall exist under 
anarchism shall be purely voluntary. Voluntary groups may be 
formed as large or as small as the individual members care to 
have them. The relations of one group to another shall likewise 
be on a purely voluntary basis. There shall be no state with a 
military arm or with police power of any kind. 

Anarchism and socialism resemble each other in that both 
profess to revolt, either in part or in whole, against any system 
which gives one man power or authority over another. Many of 
the advocates of socialism object to private capital primarily on 
the ground that it gives one man, namely the capitalist employer, 
power and authority over another man, the propertyless laborer. 
The anarchist says, regarding this opinion : It is good so far 
as it goes. We anarchists are likewise opposed to giving one 
man power or authority over another. The private ownership 
of capital does what the socialist says it does, and that is 
wrong. We are therefore opposed to the private ownership of 
capital. But capital is not the only source of authority. The 
government likewise gives one man power or authority over 
another; the capitalist employer does not in fact have as much 
power or authority as a judge or a policeman, a governor or a 
president. The socialist, therefore, is only a halfway anarchist. 
He is opposed to one source of power and authority; we are 

380 



ANARCHISM 381 

opposed to both sources. On this point the anarchist is undoubt- 
edly more logical than the socialist. 

May government eventually become unnecessary ? The 
underlying philosophy of anarchism is of various kinds. There 
is one system of thought which is frequently but improperly 
called anarchistic. It is held by certain people that government 
and compulsion are made necessary by the imperfections in human 
nature, — that if we were so highly developed morally that each 
individual would voluntarily do what he ought to do or what was 
in the public interest, then it would not be necessary to use 
authority or compulsion on anybody ; but since there are indi- 
viduals with undeveloped moral natures, — individuals who do 
not voluntarily and automatically respond to the needs of 
society, — it is therefore necessary that they be compelled to do 
what they ought to do, or (which is tlie same thing) what they 
would do if they were fully developed. 

Whether this delectable state is to be reached by the slow and 
somewhat cruel process of evolution or by the process of moral 
reform and religious evangelism may be open to speculation. 
There are probably not many people who would disagree with 
the general conclusion that government would be unnecessary in 
either case. If (but this is a large //) human nature could be so 
perfected, either by the slow elimination of the unsocial and the 
antisocial (that' is, the criminal and the immoral) or by their 
moral regeneration, it might very easily follow that government 
would ultimately become unnecessary or at least that compulsion 
by governmental authority would become a thing of the past. 
This position, however, can hardly be called anarchistic in any real 
sense, for the real anarchist believes, not that government may 
ultimately become unnecessary but that it is now unnecessary. 

Impatience of restraint. There is another type of thought, 
sometimes characterized as anarchistic, which does not revolt so 
much against government and the use of compulsion in the form 
of police power as against what is called moral compulsion ; 
that is, the setting up by society, or by people in authority, of 
standards which others are bound to follow. It is proposed, 



382 ELEMENTARY ECONOMICS 

therefore, that we throw off the so-called shackles of convention- 
ality and even of morality and that everyone do that which is 
right in his own eyes, regardless of what may be said by other 
people or by institutions and organizations which pretend to 
tell us what we ought to do. 

Is morality an invention of weaklings to curb the strong ? 
Among the people who take this point of view, however, two 
diametrically opposite conclusions are reached. There is one 
school represented by such writers as Kaspar Schmidt and Fried- 
rich Nietzsche, who hold that religion and morality are the 
inventions of the weaklings of the world for the purpose of hold- 
ing the strong in check. There is an old fable regarding the mice 
who found themselves oppressed by the cat. They voted unani- 
mously that the cat should wear a bell in order that the mice 
might be protected. According to these writers religion and 
morality are merely different ways by which mice try to put the 
bell on the cat. They try to make it unpopular for the strong 
man to use his strength. They persuade him that it is immoral 
or irreligious, or that the vengeance of supernatural agencies 
will be let loose upon him if he exercises his strength to the 
detriment of the masses. Therefore the strong man, sometimes 
called the superman, should break loose from these convention- 
alities, should snap the cords with which the Lilliputians have 
bound him, and should dare to be great and independent and 
impose his will on the masses if he is able to do so. 

Is morality an invention of those in power to curb the 
masses ? The other school of anarchists, and certain socialists 
who are anarchistic in spirit if not in program, assert that religion 
and morality are the cunning inventions of priests and soldiers 
and capitalists to hold the masses in check; that for the aver- 
age man to be good is merely to be good for somebody else — 
that is, for those in power; that to be good is to support the 
priest or the capitalist or the policeman or the judge or someone 
in authority ; that to be free is to be good to oneself. 

As to which of these two conclusions is the more absurd, it 
would be difficult to decide. They are mentioned to show to 



ANARCHISM 383 

what extremes of aberration the human mind is capable of going. 
One doctrine would lead the strong man to do as he pleased, to 
impose his will upon his neighbors either by the weight of his fist 
or by his superior power of destruction in some other form ; the 
other conclusion would lead the masses of the people to sink into 
a state of license and violence which would destroy civilization 
and land us in a sort of primeval social chaos. 

Are all human interests harmonious ? There is, however, 
another system of thought which is truly anarchistic and less 
repulsive than either of these. This system is based on the 
fundamental assumption that all human interests are harmonious. 
In this best of all possible worlds, it is claimed, there can be no 
such thing as a conflict of human interests ; it is in some way 
a reflection upon the Creator of the world to say that there could 
be anything but a harmony of real interests among men ; it 
cannot possibly be true that one man's meat is another man's 
poison ; these apparent conflicts are the creation of men and human 
institutions and are not inherent in the nature of man and the 
universe. 

This underlying assumption sounds attractive, and doubtless 
many of us would like to believe it if we could. There are, how- 
ever, so many hard facts in the way that not many of us are able 
to bring ourselves to the point of ignoring the very present and 
prevalent conflict of interests. It was shown in the chapter on 
Scarcity that the mere fact of a congestion of population — 
of too many people trying to live in one spot — creates in 
that spot a state of scarcity. Food enough in that particular 
spot cannot be produced for as many people as would like to 
live there. This situation in itself inevitably and necessarily 
produces a conflict of interests. Either some people must move 
to another spot or food must be brought from other spots to 
feed the people who are there. Either alternative will prove 
disagreeable to somebody. If neither of these alternatives is 
chosen, then there must be hunger ; more than one person will be 
wanting each parcel of food, and that in itself is a conflict of 
interests. Here are certain facts of a physical nature which 



384 ELEMENTARY ECONOMICS 

cannot by any effort of the will or the imagination be conjured 
out of existence. There is, in fact, a conflict of interests wherever 
two people want the same thing. 

Conflict of interests makes control necessary. Wherever 
there is a conflict of interests, one of two things is absolutely 
necessary : either the individuals must have a high moral develop- 
ment, which will lead each one to surrender certain interests in 
favor of others, or there must be an umpire to decide between 
them and enforce his decision. This umpire, by whatever name 
he may be called, exercises the function of government, and, in 
fact, this umpire is the government. 

Emotional anarchism. There is another type of anarchism 
which can scarcely be said to have any underlying philosophy. 
It is based wholly on feeling and sentiment. Doubtless every 
human being possesses some repugnance toward being ruled, or 
being compelled to do that which he dislikes to do, or to leave 
undone that which he would like to do. A preference for one's 
own way shows itself rather early in the lives of children. Doubt- 
less all of us feel bitter at times regarding some act of a govern- 
ing agency or authority. Generally, however, we are able to 
keep these feelings under sufficient control to enable us to 
obey law and support the government. In other words, we 
generally see the necessity of government, however disagreeable 
it is at times to be forced to submit. Occasionally, however, an 
individual will react in the other way ; that is, his repugnance 
will overcome his judgment. He has no particular philosophy, 
though he can always invent a reason or an excuse. A policeman, 
a court, or a flag, or any other evidence of symbol of government 
is as a red flag in his face ; it causes anger, resentment, and 
insurgency, and nothing else. Such people are sometimes very 
adorable in other respects. So long as their feelings are properly 
soothed they may be exceedingly affectionate and loving. Those 
who know them personally find it difficult to reconcile their 
general personal qualities with their feeling against government. 
Nevertheless, from any broad and philosophical point of view 
they are among the most dangerous members of society. They 



ANARCHISM 385 

are the unadapted in a very important social sense. Mentally 
and morally they are as unfit for living under a settled, orderly 
government as a fish is physically unfit for living out of water. 
The process of evolution which, according to some writers, would 
eventually produce the delectable state of society in which all 
would think and feel alike is steadily weeding such people out. 
They insist on bumping their heads against the walls of the uni- 
verse and destroying themselves along with the criminals and 
others who are unadapted to a settled civil life. 

There is still another type of anarchist who is merely mean and 
bent on making trouble. He can always be relied upon to be 
on the wrong side of every question. Wherever decent, self- 
respecting men and women are in general agreement on any 
subject, he will always be found opposing them. It is true, he 
does not always go in for anarchism. He is found in every move- 
ment which gives him a chance to vent his general hate and spite- 
fulness. Wherever there is a chance to denounce government, 
religion, law, order, morality, chastity, sobriety, or anything else 
that is of good repute, his voice is always heard. He generally 
tries to get into good company by calling himself a radical, 
an iconoclast, or a revolutionist, knowing that excellent men and 
women have been called by all of these names. 

Is patriotism a vice ? There are various other views, some 
of them of an idealistic nature, which savor of anarchism and 
lead to absurd conclusions on practical subjects. One of these 
is that patriotism is a vice. This strange doctrine is advanced 
on grounds of the broadest humanitarianism. We should love 
all men equally, it is urged, without regard to race, color, creed, 
or nationality. The patriot cares more for his fellow citizens 
than for the citizens of other countries; therefore, according to 
this type of anarchism, he is narrow in his views. Moreover, if 
he thinks more of his fellow citizens than of others, this will lead 
him, in case of war, to try to kill the citizens of the enemy 
country. Killing, it is argued, is murder. The fact that it is 
done as an act of war does not in the slightest degree change its 
character. 



386 ELEMENTARY ECONOMICS 

When a great world state exists, then, of course, it will be proper 
to be patriotic toward it. We may even work consistently for it. 
But to condemn all patriotism for lesser states would, if this con- 
demnation were effective, merely destroy existing states and all 
law and order, and land the world in chaos. Family sentiment 
is narrow in the same sense that national sentiment is narrow. 
The man who loves his wife must care more for her than for other 
women. This and all other forms of family sentiment may, in a 
sense, make us narrow, but it does not follow that it is bad to 
be narrow. Again, if we are to avoid narrowness, why be human- 
itarians ? Are not many animals also companionable and lovable ? 
To show a preference for men is to be narrow in the sense in 
which these people use that word. 

EXERCISES 

1. What is anarchism? 

2. How does it differ from socialism? 

3. Is one an anarchist merely because he believes that government 
may eventually become unnecessary? 

4. Is a believer in the millennium an anarchist? 

5. What type of anarchist holds to the belief that morality is an 
invention of weaklings to curb the strong? 

6. What type believes that morality is an invention of those in 
power to curb the masses ? 

7. Are all human interests harmonious ? 

8. If not, is there need of an umpire? 

9. What is meant by emotional anarchism? 

10. Does the anarchist hold that patriotism is a vice or a virtue? 



CHAPTER XLVII 

CONSTRUCTIVE LIBERALISM 

What the liberalist believes. A liberalist in economics is one 
who believes in the freedom of the individual rather than in com- 
pulsion. He believes that individuals will, without compulsion 
and by voluntary agreement, do most of the things that are neces- 
sary to provide for the needs of the community. He believes that 
it is not necessary continually to impose upon the individual the 
authority either of a benevolent despot or of a well-meaning 
majority. In such extreme cases as can be covered by the criminal 
law, laws for the prevention of violence and fraud, for the en- 
forcement of contracts, and laws for the standardization of various 
aspects of business, compulsion is necessary and helpful. He 
believes that the interests of the public are expressed quite as 
accurately on the market and through the price lists as through the 
ballot box and the statute books. He even believes that poverty 
and most of the social ills can be eliminated under the system of 
voluntary agreement — freedom to accumulate, to own, and to 
operate private property — and without subjecting individuals 
to the necessity of becoming government employees. 

Freedom versus compulsion. There are only two ways of 
getting men to do what is necessary for the prosperity of the 
nation : one is to induce them by the offer of a reward either of 
a material or of an immaterial kind ; the other is to compel them 
by authority. For example, an army can be recruited and men led 
to fight for their country either by the volunteer system or by 
conscription. The industrial army may likewise be recruited by 
either method. The one is the method of freedom ; the other is 
the method of compulsion. Men may be induced to work on the 
farms and in the factories and mines by the offer of wages, profits, 
etc., or they may be directed by authority to do so. 

387 



388 ELEMENTARY ECONOMICS 

If no one were allowed to accumulate capital or to own a farm, a 
factory, or any kind of business property, we should have much 
less freedom to choose our own occupations and to direct our- 
selves than we have under a system of free private enterprise and 
voluntary agreement. Under a regime of complete government 
ownership and operation men would have to be chosen by au- 
thority for the higher as well as for the lower positions in the 
industrial system. 

Opposed to socialism. That there would be less freedom under 
universal government ownership than under private ownership will 
be clear to anyone who understands that under the former no one 
could even begin farming on his own initiative, but would have to 
be placed in charge of a farm or told to work under a boss, accord- 
ing as those in authority should decide. Under a liberal system 
anyone who can handle a farm successfully can become a farm 
manager and ultimately a farm owner, as thousands have already 
done. The same may be said of other industries. 

The liberalist believes that, in general, the volunteer plan is 
better than the compulsory one. There are, of course, occasions 
when compulsion becomes necessary, but these are usually occa- 
sions of acute and instant necessity, when there is not time for 
the market to adjust itself and to organize a volunteer system. 

In time of war compulsion takes the place of freedom. 
Socialists are in the habit of saying that in time of war nations 
turn to socialism. It is true that in time of war compulsion is 
generally, or at least to a considerable degree, substituted for 
freedom; but the whole business of war is compulsion. Our deal- 
ing with foreign enemies is necessarily on a compulsory rather 
than on a voluntary and contractual basis, and the whole organi- 
zation of society may have to be changed from freedom to com- 
pulsion in order to carry on the compulsory business of war. 

There are a multitude of minor forms of compulsion besides 
war itself. Taxation is a compulsory payment of money to the 
government. Conscription is compulsory military service. Forced 
loans are compulsory in a high degree. The censorship of the 
press is merely compulsory regulation of the business of selling 



CONSTRUCTIVE LIBERALISM 389 

talk for private profit. It may be necessary, in order to prosecute 
a war successfully, to resort to compulsion in recruiting munition 
factories and even farms. Rationing the population in time of 
food scarcity may be necessary. 

Compulsion cannot create equality. In a regime of universal 
compulsion some must necessarily be treated better than others. 
Even though conscription be carried out without personal favor, 
the result works to the disadvantage of those drawn by conscrip- 
tion as compared with those not drawn. Those on whom the lot 
falls act as shock-absorbers for the rest of the community. There 
is nothing particularly democratic about this, though it may be 
the best possible way of meeting a national crisis. Under such 
conditions, when the life of a nation is at stake, it does not stop 
for the niceties of social justice. Necessity knows no law. It is 
probable, however, that as a result of several years of this com- 
pulsion there would be so much dissatisfaction and sense of 
unfairness as to provoke a strong reaction against compulsion and 
in favor of the volunteer system, not only in the work of fighting 
but in business and industrial pursuits as well. We might con- 
sider ourselves fortunate if this reaction did not carry us too far 
in the direction of license and impatience with all restraint. 

Dangers of freedom. Freedom of trade — freedom to buy and 
sell, to offer and accept rewards — is a part of the program of 
liberalism. There are, however, some very serious results which 
accompany freedom of bargaining. The advantage in bargaining 
is always on the side of those who are trying to sell something 
which is undersupplied or of those who are trying to buy some- 
thing which is oversupplied. When there is a long-continued 
oversupply of certain commodities or of certain kinds of labor, 
those who are under the disadvantage of trying to sell them feel, 
naturally enough, that they are playing a losing game. They are 
frequently willing to take their chances under some form of 
compulsion, feeling that they could not be much worse off than 
they are under the system of free contract. 

The situation of those trying to sell something that is over- 
supplied, especially if it happens to be labor, is summarized in the 



390 ELEMENTARY ECONOMICS 

statement that 'liberty is frequently the liberty to starve." It 
must be confessed that liberty is dangerous, even though it is very 
precious. Severe conditions are imposed on free men. Liberty to 
be on the street may mean liberty to get run over by an automo- 
bile. Liberty to go swimming may mean liberty to drown. Liberty 
to sail the seas may mean liberty to get shipwrecked. Children 
who are restrained in their liberty and are forbidden to be on the 
street are in less danger of being run over, and those who are 
prevented from going in swimming are in less danger ot being 
drowned. Liberty is a terrible thing, but at the same time it is, 
for grown men, beyond price. Liberty to buy and sell may mean 
liberty to become bankrupt. The individual who has a guardian 
to forbid him to do any bargaining whatsoever may be safe from 
bankruptcy. 

In ordinary times, for some hundreds of years back, the un- 
skilled laborer has been at a disadvantage. A great many sym- 
pathetic people have assumed that there was something inherent 
in the nature of labor that put the laborer at a disadvantage, and 
something inherent in the nature of capital that put the capitalist 
at an advantage in the bargaining process. This is not true, al- 
though, as we have seen above, conditions have generally been 
more favorable for the capitalist than for the unskilled laborer. 
But whenever and wherever unskilled labor has been hard to find, 
the advantage has been quite as much on the side of the unskilled 
laborer, and the disadvantage quite as much on the side of the 
employer. 

Whenever it has been possible for an employer to hang out his 
shingle saying "Men Wanted" and have ten men apply for each 
position, the conditions have been favorable for the employer and 
unfavorable for the laborer. The fact that there are more men 
applying for jobs than there are jobs to be had is a sure indication 
of an oversupply of labor. The case is parallel to that which 
would exist if a buyer of wheat could hang out a sign "Wheat 
Wanted" and have many times more wheat offered than he could 
buy. That would be a sure indication of the oversupply of wheat. 
On the other hand, if a farmer should put up a sign which read 



CONSTRUCTIVE LIBERALISM 391 

"Wheat for Sale" and find that many more buyers than he could 
supply were coming to purchase wheat, that fact would indicate an 
undersupply of wheat. Similarly, if a laborer, by putting out a 
sign "Job Wanted" should have several employers coming after 
him, this fact would indicate an undersupply of labor. 

Making the advantages even on both sides. The policy of 
the constructive liberalist is indicated by these observations. It is 
his opinion that conditions can be created under which the average 
employer will find it as hard to get a man to work for him at 
liberal wages as the man will find it to get an employer to hire him 
at those wages. When that is accomplished the advantages in 
bargaining will be about even. Labor would no longer be under a 
handicap in the bargaining process. Laborers will no longer feel 
the need of some compulsory restriction upon bargaining, but will 
feel quite able to take care of themselves without help from the 
government or any other compulsory agency. 

A program looking in this direction may take a little longer to 
work out, but from the point of view of the constructive liberalist 
the results, once achieved, are vastly preferable to any achieved 
under a compulsory system. There is an old story about a wagoner, 
one of whose wheels got into a deep rut. Instead of trying to 
extricate it, he sat down by the side of the road and called upon 
Hercules to aid him. The story goes that Hercules replied that if 
the man would put his shoulder to the wheel, he could get out of 
the difficulty without calling on outside help. This, according to the 
liberalist, represents a general tendency in human nature. The 
government is our Hercules, and whenever we get into difficulties 
we are in the habit of sitting down and crying vociferously for 
the government to come and do something. 

"Doing something" for people. Beneficence, is, of course, 
a characteristic of good government ; but many of us, according 
to the liberalist, have never reached the point where we can under- 
stand that a "beneficent letting alone" is sometimes the most 
beneficent thing the government can give us. There are many 
people who feel that when they are ill the doctor must " do some- 
thing." They do not realize that sometimes the most beneficent 



392 ELEMENTARY ECONOMICS 

thing the doctor can do is to do nothing. A doctor whose desire 
is to please his patients may feel under some compulsion to do 
something for them, even if it is nothing more than to give them 
bread pills. From the standpoint of the liberalist much of our 
so-called social legislation consists of bread pills. 

Sometimes, however, it is really necessary that the doctor should 
do something. The doctor whose skill consists in his ability to 
cure sickness rather than to please patients will have enough to 
do, provided the people know enough to appreciate him. The same 
may be said of a government. There are a few really vital things 
that a government may do. If it succeeds in doing these few 
things well, it will then be unnecessary to do the thousand and 
one trivial things that it is asked to do. 

So far as this country is concerned, probably the most far- 
reaching and constructive piece of legislation in the last generation 
has been the restriction of immigration. This is one of the few 
acts of the government which go directly to the root of the diffi- 
culty of low wages and poverty. It is an act which definitely aims 
at preventing an bversupply of unskilled labor such as formerly 
existed. It is true that it does not go far in this direction, but 
at least it indicates to the public that the government has recog- 
nized the source of the difficulty and is no longer proceeding on 
general guesswork in an attempt to overcome it. If it will go 
a little farther in the same direction, it will make unskilled labor 
permanently so scarce and hard to find that the unskilled laborer 
will no longer be at a disadvantage, but can bargain on even terms 
with employers and secure high wages for himself without help 
from anybody. 

A low standard of living and a high birth rate. But im- 
migration from Europe and Asia is not the only source of over- 
supply of unskilled labor. The high birth rate among the ignorant 
and unskilled is another large source of cheap labor. Nothing, 
apparently, but a rise in the standard of living will reduce the 
volume of this stream. A rise in the standard of living means an 
increase in the number of things which the average man or woman 
thinks necessary to the support of the family. The more things 



CONSTRUCTIVE LIBERALISM 393 

they feel they must have before they can marry and support a 
family, the longer they will postpone marriage. The longer they 
put off marrying, the smaller number of children there will be in 
the family, partly, at least, because the child-bearing period of the 
wife is reduced. If the age of marriage is raised on the average 
from eighteen to twenty-three, there are five less years during 
which the wife may bear children. 

Families too small among the educated classes. The restric- 
tion of immigration among the ignorant and unskilled, of course, 
has nothing to do with the restriction of immigration among the 
educated and skilled. The latter are as free to come as when im- 
migration was unrestricted. Similarly, a rise in the standard of 
living among the ignorant and unskilled has nothing to do with 
the marriage and the birth rate among the educated and skilled. 
Among the latter classes the reform ought to proceed in quite the 
opposite direction. There is no doubt that among these people 
marriages are postponed too long, and the average families are 
too small. 

Increasing the supply of employers. The decrease in the 
number of people born with the heredity and prospective training 
which fit them for skilled positions and for positions in the ranks 
of the employing class tends to reduce the demand for unskilled 
labor. Hitherto unskilled laborers have suffered from two causes : 
the fact that there have been too many unskilled laborers, and the 
fact that there have been too few employers. It is as though, in 
the badly balanced ration of an individual or an animal, the too 
abundant ingredient, say starch, were to be increased more and 
more, and the too scarce ingredient, say protein, were to be de- 
creased more and more. The combined result of increasing the one 
and decreasing the other would produce a more and more un- 
balanced ration, to the detriment of the man or the animal that 
was being fed. The continuous increases in the ranks of the un- 
skilled laborer through immigration, together with the high birth 
rate, and the decrease in the highly skilled and managerial labor 
through the postponement of marriage and various other causes, 
have tended in the past to produce a progressively unbalanced 



394 ELEMENTARY ECONOMICS 

population, tending to make unskilled labor cheap and to make 
highly skilled and managerial talent dear. 

Fortunately the effect of this combination of processes has been 
offset, at least partially, by our system of popular education. Such 
a system of universal and popular education has the effect of re- 
distributing talent, of taking young people who would otherwise 
have remained in the ranks of the unskilled, and training them 
for the ranks of the skilled, the managing and the enterprising 
class. This tends to reduce the supply of ignorant laborers and 
increase the supply of educated workers. If the system of popular 
education continues to improve, and greater and greater restric- 
tions are placed upon the importation of unskilled labor, and a 
higher standard of living is acquired by our own unskilled labor- 
ers, the combined results of these three changes will tend to make 
unskilled labor scarce and hard to find, to make jobs abundant 
and easy to find, and, for both reasons, to give the unskilled 
laborer the advantage not only of retaining his liberty of contract 
but also of prospering under it. If we carry out our educational 
policy to its logical limit and train not only skilled laborers but 
also managers and employers, and at the same time create a more 
rational standard of living and better moral conditions among 
these classes, the combined results of these two policies — that is, 
training men for the high positions and encouraging larger families 
among them — will so increase the numbers of the managerial class 
as to take away its present advantage in the bargaining process. 
By following this general process throughout all ranks of society 
we may expect in a short time so to balance the advantages of 
bargaining as to give us something approximating equality without 
substituting compulsion for freedom. 

Thrift and the laborer. The encouragement of thrift will tend 
in the same direction and will accelerate the process of putting 
unskilled labor in a position to prosper under freedom. It is 
through thrift that capital accumulates. When capital becomes 
so abundant that the average owner of capital has great difficulty 
in finding an opportunity to use it, he will have to be content with 
a smaller share in the products of industry. 



CONSTRUCTIVE LIBERALISM 395 

The encouragement of productive enterprise, the frank acknowl- 
edgment of our obligation to the man who shows the ability to 
plan a new enterprise and, what is vastly more important, to make 
it actually succeed, will do a great deal to expand the opportunities 
for those of us who do not possess that kind of ability, The more 
such men we can develop among us, the more our industries will 
expand and the more opportunities for remunerative employment 
there will be for the rest of us. 

Poverty easily curable under freedom. We need not have 
poverty among us a generation longer than we want it. By setting 
to work deliberately to balance our population, causing ignorance 
and lack of skill to disappear and causing technical training and 
constructive talent to increase, we can, in a short space of time, 
make low wages and poverty a thing of the past. What is even 
better, we can do this and still leave everyone a free man. This 
is the gospel of the new, or constructive, liberalism which is des- 
tined to bring relief — if not to this nation, at least to some nation 
which has the wisdom to adopt it — and which, when adopted, will 
keep that nation in the position of leadership among all the nations 
of the earth. 

A LIBERALIST'S PROGRAM FOR THE COMPLETE ABOLITION 
OF POVERTY! 

I. Legislative Program 

A. For the redistribution of unearned wealth 

1. By increased taxation of land values 

2. By a graduated inheritance tax 

3. By control of moilopoly prices 

B. For the redistribution of human talent 

I. By increasing the supply of the higher, or scarcer, forms of talent 

(a) By vocational education, especially for the training of busi- 
ness men 

(b) By cutting off incomes which support capable men in 

idleness 

^ Compare the author's work entitled " Essays in Social Justice," chap. xiv. 
Harvard University Press, 191 5. 



396 ELEMENTARY ECONOMICS 

2. By decreasing the supply of the lower, or more abundant, forms 
of labor power 
(a) By the restriction of immigration 
(h) By the restriction ol marriage 

(i) By the elimination of defectives 

(2) By the requirement of a minimum standard income 

(c) By a minimum- wage law 

(d) By fixing building standards for dwellings 
C. For the increase of material equipment 

1. By increasing the available supply of land 

2. By increasing the supply of capital 

(a) By encouraging thrift versus luxury 

(b) By building up savings institutions 

(c) By making investments safe 

II. NONLEGISLATIVE PROGRAM 

A. For raising the standard of living among the laboring classes 

1. The educator as the rationalizer of standards 

2. Thrift and the standard of living 

3. Industrial cooperation as a means of business and social 

education 

B. For creating sound public opinion and moral standards among the 

capable; for example, 

1. The ambition of the family-builder 

2. The idea that leisure is disgraceful 

3. The idea that the productive hfe is the religious and moral hfe 

4. The idea that wealth should be regarded as a means of pro- 
duction rather than a means of gratification 

5. The idea that the possession of wealth confers no hcense for 

luxury or leisure 

6. The idea that government is a means, not an end 

7. Professional standards among business men 

C. For discouraging vicious and demoralizing developments of public 

opinion; for example, 

1. The cult of incompetence and self-pity 

2. The gospel of covetousness or the jealousy of success 

3. The idea that the capitalization of verbosity is constructive 

business 



CONSTRUCTIVE LIBERALISM 397 

EXERCISES 

1. What is meant by a liberalist in economics? 

2. How can men be induced to do things necessary foV the good of 
the nation? 

3. Can any system of compulsion secure equality? 

4. What is meant when it is said that freedom is a dangerous thing ? 

5. Does the fact that it is dangerous mean that it is undesirable? 

6. Is it possible to have equahty and freedom at the same time? 

7. How can we have both? 

8. In what two ways does thrift benefit the laborer? 

9. In what two ways does universal education benefit the laborer? 
10. Outline a Hberal program for the aboHtion of poverty. 



INDEX 



Agricultural credit, 232 
Agriculture, why it is losing ground, 

148 
Anarchism, 380 

Balance of the factors of production, 

117 
Balanced population, 119 
Bank notes, 230 
Business, organization of, 100 

Capital, meaning of, 91 ; productivity 
of, 99 

Capitalist, function of, 96 

Civilized man, economic character- 
istics of, 129 

Communism, 353 

Competition, what it is, 39 

Confidence and economy, 53 

Conflict of interests, 58 

Consumption of wealth, 319; ra- 
tional, 325; control of, 340 

Cooperation, meaning of, 45; where 
successful, 46; voluntary versus 
compulsory, 49 

Cooperative society, the, 107 

Corporation, the, loi 

Crises, commercial, 235 

Demand and supply, basis of, 203 
Depressions, industrial, 236 
Diminishing returns from land, 146 
Division of labor, 75 

Economic goods, what they are, 8 

Economize, what the word means, 4 ; 
why we must, 5 ; three ways to, 6 

Economy, meaning and importance 
of, 4 

Extractive industries, 132; instabil- 
ity of, 142 

Federal Farm Loan system, 232 
Federal Reserve system, 230 
Fish culture, 153 



Fishing, 134 
Forestry, 153 

Genetic industries, 143 
Geographical advantages of the 

United States, 19 
Geographical situation, favorable, 16 
Getting a living, ways of, 125 
Government, share of, in distribu- 
tion, 306 

Hunting, 132 

Intensive farming, 114 

Interest, meaning of, 290; why paid, 

291 ; and the supply of capital, 

296; law of, 299 
Investing, or buying producers' goods 

instead of consumers' goods, 95 

Land, fertility of, iii 
Large-scale production, 162 
Law, need for, 51 
Leisure class, 64 
Liberalism, constructive, 387 
Limited liability, 102 
Location value of land, 112 
Lumbering, 136 
Luxury, 68, 322 

Man, value of a, 322 
Manufacturing industries, 159 
Margin of cultivation, 284 

Marginal utility, 199 

Market, first law of, 201 

Merchandising, 182 

Mining, 140 

Money, use of, 215; kinds of, in the 

United States, 218 
Monopolizing, 186 

Partnership, 100 

Pasturage, 135 

Poverty, program for abolition of, 

395 



399 



400 



ELEMENTARY ECONOMICS 



Power, sources of, 90 
Production, primary factors of, 3 
Professional service, 188 
Profits, meaning of, 301 
Prosperity, basis of, 3 

Race of men, characteristics of a 

capable, 29 
Railway development of the United 

States, 174 
Rent, definition of, 283; why paid, 

283 ; law of, 288 
Revenues, public, classification of, 

306 
Risk, necessity of, 302; irksomeness 

of, 203 

Saving, cost of, 300 

Scarcity, meaning of, 203 

Single tax, 372 

Socialism, 363 

Standardization, 186; and economy, 

54 
Standards of living, 346 
Steam engine, 88 
Storing goods, 184 



Struggling for existence, methods of, 

40 
Sumptuary legislation, 341 

Tax, meaning of, 307 

Taxation, canons of, 314 

Tillage, 144 

Transportation, 170 

Thrift, and accumulation, 66; as re- 
lated to the value of a man, 327; 
as related to progress, 321; in 
times of crisis, 336 

Trust, the, 106 

Utility, relation of, to value, 196; 
marginal, 199 

Value, its meaning, 193; its cause, 
199; present and future, 297; why 
a thing has, 15 

Waiting, irksomeness of, 296 

Waste of man power, 62 

Wealth, two meanings of, 8; how 

measured, 92 
Well-being, relation of, to wealth, 9 



ANNOUNCEMENTS 



BOOKS IN POLITICAL SCIENCE 

Allen : Civics and Health 

Bullock : Selected Readings in Economics 

Bullock : Selected Readings in Public Finance 

Callender: Selections from the Economic History of the United 

States, 1 765-1 860 
Carver : Principles of Political Economy 
Carver: Principles of Rural Economics 
Carver: Selected Readings in Rural Economics 
Carver : Sociology and Social Progress 
Clark : Philosophy of Wealth 

Commons : Trade Unionism and Labor Problems 
Davis : Immigration and Americanization 
Dealey : Growth of American State Constitutions 
Fess : Political Theory and Party Organization in the United States 
Gettell : Introduction to Political Science 
Gettell : Problems in Political Evolution 
Gettell : Readings in Political Science 
Gregg : Handbook of Parliamentary Law 
Hayes : British Social Politics 
Johnson : Money and Currency (Revised Edition) 
Keller: Colonization 
Morse : Civilization and the World War 
Orth : Readings on the Relation of Government to Property and 

Industry 
Reinsch : Readings on American Federal Government 
Reinsch : Readings on American State Government 
Ripley : Railway Problems (Revised Edition) 
Ripley: Trusts, Pools, and Corporations (Revised Edition) 
Sumner : Folkways 
Ward : Applied Sociology 
Ward : The Psychic Factors of Civilization 
White: Money and Banking (Fifth Edition. Revised to 1914) 
Wilson : The Hague Arbitration Cases 
Wolfe : Readings in Social Problems 



GINN AND COMPANY Publishers 



PRINCIPLES OF POLITICAL 
ECONOMY 

By Thomas Nixon Carver, Professor of Political Economy in 
Harvard University 

i2mo, cloth, ix + 588 pages 

A NONTECHNTCAL discussion of the problems of nation-building 
designed by its scope and style to interest the general reader, and 
fitted by its arrangement for classroom use. At no period in the his- 
tory of democracy have men been compelled to think so seriously on 
the question of the strength of democratic nations as at present, nor 
has it ever been so apparent that national strength is largely economic. 
This book examines the economic foundations of our national strength 
and points out some of the more direct methods of improvement. 

The discussion is aimed at the plain average citizen and at the student 
who will be the average citizen of the coming years, since the people 
themselves must understand the economic principles upon which 
national greatness depends. The book is particularly recommended 
for high-school seniors and for students beginning the study in college. 

SOCIOLOGY AND SOCIAL PROGRESS 

A HANDBOOK FOR STUDENTS OF SOCIOLOGY 

By Thomas Nixon Carver, Professor of Political Economy in 
Harvard University 

8vo, cloth, Sio pages 
Extracts from the more significant writings on social problems 
of the last two centuries, classified and arranged in logical sequence 
to give a systematic view of the subject. Although designed prima- 
rily for juniors and seniors in our colleges and universities the general 
reader will find it most readable. It may be used as a textbook, as 
the basis of a course in sociology, or as a companion volume to one 
of the various textbooks already in use. 

^ ~ 

GINN AND COMPANY Publishers 



''THE BOOK THAT MAKES AMERICANS" 

MY COUNTRY 

By Grace A. Turkington. i2mo, cloth, 381 pages, illustrated 

'' My Country " teaches children of all the races who make their 
home in America just what it means to be an American. It discloses 
the rights, advantages, opportunities, responsibilities, and obligations 
of American citizenship. It tells not too much, but exactly what 
every boy and girl ought to know, of America's laws, government, 
finance, and military institutions. All this and more the author has 
put into a book which she realizes will be the only study of patriotism 
and civics that many a boy and girl will ever read. The volume has 
therefore been most thoughtfully prepared to include exactly the 
essentials for making an American. 

But '' the book that makes Americans " is no ordinary textbook. 
Open the book at random. You will find that almost every page has 
the power of swift narrative. In fact, many of the chief points are 
emphasized by brief, illustrative stories. In language the book has 
an almost primitive simpHcity, as delightful to grown-ups as to chil- 
dren. The illustrations might have been written into the manuscript, 
they are so completely a part of the book. N. C. Wyeth's colored 
frontispiece appeals straight to the highest ideal of every American. 
The chapter titles are 

America — What is it? Rules, Regulations, and Laws 

The People of America The People govern Themselves 
America and Liberty by Means of Laws 

America — its Language Paying the People's Bills 

Making an American An Enemy of the United 
The Children's Age States 

Why we have Schools Efficiency — Thrift 

Making the United States Efficiency — Health 

Safe for Children How America has helped 
How Things come About Oppressed Nations 

Representative Government War — What is it? 

The President and his The Army and the Navy 

Assistants Our Flag 



GINN AND COMPANY Publishers 



BOOKS FOR TEACHERS 

Allen : Civics and Health 
Bennett: School Efficiency 
Bloomfield : Readings in Vocational Guidance 
Brigham : Geographic Influences in American History- 
Curtis : Play and Recreation for the Open Country 
Davis : Vocational and Moral Guidance 
Finlay-Johnson : The Dramatic Method of Teaching 
Gesell : The Normal Child and Primary Education 
Hall : Aspects of Child Life and Education 
Hodge : Nature Study and Life 
Johnson : Education by Plays and Games 
Johnson : What to do at Recess 
Jones : Education as Growth 
Judd : Psychology : General Introduction 
Judd : Psychology of High-School Subjects 
Judd : Scientific Study of Education 
Kastman and Kohler : Swedish Song Games 
Kern : Among Country Schools 

Kirkpatrick : Imagination and its Place in Education 
Leavitt : Examples of Industrial Education 
Leiper : Language Work in Elementary Schools 
Lincoln : Everyday Pedagogy 
Moore : Fifty Years of American Education 
Moore : What is Education ? 
Moral Training in the Public Schools 
Palmer : Play Life in the First Eight Years 
Parker : General Methods of Teaching in Elementary Schools 
Parker : History of Modern Elementary Education 
Parker : Methods of Teaching in High Schools 
J.H^Lt"?-*/ Phillips: An Elementary Psychology 
Read : An Introductory Psychology 

Sargent : Fine and Industrial Arts in Elementary Schools 
Sargent and Miller : How Children Learn to Draw 
Scott : Social Education 
Smith : The Teaching of Arithmetic 
Smith : The Teaching of Geometry 
Tompkins : Philosophy of School Management 
Tompkins : Philosophy of Teaching 



196 

GINN AND COMPANY Publishers 



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